It's a notoriously time-consuming and headache-inducing process, but it's gotten better since the recession: Banks are gradually lending more, a crop of online lenders are offering much more credit--at a price--and regulators have been looking for ways to make it easier for you to get a loan. Which is not to say it's completely easy or risk-free, especially if you're applying to one of the newer fintech lenders.
"Right now is actually quite a good time for small businesses to borrow, but getting a loan that works for you and is affordable and has terms you can understand is still a challenge," says Karen Mills, a former head of the Small Business Administration under President Obama and now a senior fellow at Harvard Business School.
In November, Mills and Brayden McCarthy, vice president of strategy at online lending startup Fundera, published "The State of Small Business Lending: Innovation and Technology and the Implications for Regulation," a comprehensive look at the current market for small-business credit. What they found can help you figure out where to look for a loan, if and when you're ready to expand your business.
The Slow, If Spotty, Recovery
The number of small-business loans fell dramatically during the recession, as big banks cut off credit to customers they considered risky and many smaller and regional banks that once lent to local business owners shut their doors. It's better now. In 2016, eight years after the crash, 45 percent of small-business owners reported applying for credit, up from 22 percent in 2014, according to the Federal Reserve. As these two charts show, pessimism about the lending atmosphere is currently low--but getting all the money you need remains a problem.
Is Borrowing Harder or Easier?
Businesses that regularly borrow money report changes in their ability to get credit versus three months prior.
You're Still Not Getting Everything You Want
The bigger your business, the more likely you are to get all the credit you apply for.
What You Ask For
Almost 75 percent of small businesses apply for loans of $250,000 or less:
The Shifting Pool of Lenders
Banks are probably never going to lend you all the money you need. For one thing, there are fewer of them--5,900 at the end of 2016 versus 8,500 at the end of 2007, according to the FDIC. Many of those that closed or got bought were the friendly local lenders that knew you and your business. Newer online lenders, including Lending Club, OnDeck, Kabbage, and Funding Circle, offer quick and easy loans, but sometimes at nosebleed interest rates. "As the online marketplace evolves, those [lenders] who succeed will be the ones that have access to low-cost capital and those who can best serve the small-business customer, creating products that fit their needs," Mills and McCarthy write.
Where the Money's Moving
Despite online lenders' growth, banks still receive the most small-business credit applications:
More Money, More Problems
Customer satisfaction at online lenders is still pretty low, "in part due to high costs," Mills
and McCarthy write. Customer satisfaction by lender type, according to the Federal Reserve:
The Washington Wild Card
For bank loans, don't expect big changes. It remains to be seen how the proposed rollbacks in crisis-era financial regulations will affect small-business lending (see "How Businesses Are Dealing with Washington's Unprecedented Uncertainty"). But Mills and other experts don't expect banks to change their risk-averse policies. Nor are the small banks that closed during the recession likely to return. Meanwhile, last year was a bumpy one for online lenders: Lending Club, the onetime standard-bearer of the online startups, fired its founder; rising interest rates made it more expensive for these startups to do business; and funding for the fintech sector has dropped off. Yet some regulatory measures could help expand online small-business lending, including an OCC proposal for a banklike charter for fintech lenders.
Online Lending's Rapid Growth
"Marketplace" lenders are companies that allow you to borrow money online, either directly from them or their institutional investors or from other individuals.