The Timid Mindset of Small Businesses
BY Matt Quinn
I've been trying to wrap my head around the state of small business lending for a while. And not just the availability of financing, but demand for it.
We've all heard the talk out of Washington that banks need to start opening their purse strings to small businesses if we want the U.S. economic recovery to truly take hold. In response, banks including Goldman Sachs, Bank of America and J.P. Morgan Chase have earmarked extra funds for small business lending. They're at least trying to look eager to lend, but there are still plenty of horror stories about what it takes to get your hands on a loan.
Still, despite widespread insistence that small businesses are clamoring for funds, data out of the Federal Reserve shows that demand for loans from small firms has been weakening for some time.
So while businesses may not be actively pursuing financing, we need them to.
Now, back to those banks. The Pepperdine survey found that more than a third of privately-held business respondents used banks as an investment source, the second most used source behind friends and family (56 percent).
On top of that, 55 percent of small business owners felt they qualify for a bank loan. (Only the vague 'private investor investment' was cited more often as a source of capital owners felt they could get.) I found this particulary surprising since a reason often given for the lack of loan demand was that would-be borrowers simply felt they wouldn't qualify for a loan due to stricter lending standards.
Is there something unappealing about bank loans? Hardly. The survey found that small businesses had the best overall impression of bank loans as a source of capital out of eight choices. (Factoring had the worst reputation.)
Even so, only 21 percent of small businesses expected to raise funds from a bank over the next 12 months, making it the third most popular choice behind friends and family and angel investors. A full 36 percent of businesses didn't expect to raise any funds.
Let's add all of this up: small businesses believe they could improve their bottom line with more financing, many believe they qualify for a bank loan -- which also happens to be the most appealing finance option -- and, yet, small businesses don't appear to be pursuing loans aggressively.
The reason is likely that small business owners are confused by which direction the economy is going, a point highlighted by Kent Bernhard, Jr. over at Portfolio.com on Wednesday as he tried to interpret the conflicting sentiments expressed by business owners in various surveys.
So while small businesses may be confident in their own ability to rebound, they still don't feel so sure about the economy as a whole and (understandably) don't want to be the ones taking all the risk.