Growing Sources of Financing for U.S. Small Businesses
Small businesses are the foundation of the United States. In the United States, small businesses make up 99.7 percent of U.S employer firms, 64 percent of net new private-sector jobs, and 46 percent of private-sector output (https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf). Following the financial crisis of 2008, small businesses have had to be creative to obtain financing to fund growth and ongoing operations (http://www.entrepreneur.com/article/222540).
Sources of funding for small businesses
Credit, primarily through term financing are one of the primary sources of funding for small businesses (https://www.fundera.com/blog/2014/08/29/bank-lending-small-businesses-isnt-recovering/). Unlike large firms, small businesses don’t have the access to public debt and equity capital markets that larger firms do.
The impact of a financial crisis is much greater to small businesses than larger businesses. The 2008 Financial crisis was no exception. While lending to large businesses has returned to pre-crisis levels, this has not been the case for small business (https://www.fundera.com/blog/2014/08/29/bank-lending-small-businesses-isnt-recovering/). Because of the lack of funding available to small businesses and technology, there has been very rapid growth in alternative lenders to small businesses.
Alternative lenders vs. traditional lenders
Alternative lenders are online lenders and marketplaces. The size of the financing portfolios of alternative lenders has doubled every year since the mid-2000s (http://www.federalreserve.gov/newsevents/speech/brainard20150930a.htm). While this growth is significant, the financing balance portfolios of traditional lenders are still several times larger than those of alternative lenders.
The technology being used by alternative lenders is changing the ways that small businesses access capital. These changes are:
- Creating greater competition,
- Increasing efficiencies,
- Creating price transparency, and
- Possibly making small business lending more profitable.
As a result, alternative lenders are disrupting the market for small business as well as personal financing. Compared to traditional lenders, alternative lenders are providing:
- A fast and simple application process
- fast lending decisions
- fast funding, and
- Improved customer service
Several factors have come together to create rapid growth in the alternative lending industry. This growth is not showing any signs of slowing down. Traditional lenders have just recently started competing in this space.
Are alternative lenders solving the problems financing needs facing small businesses? It is starting to look that way but time will tell ( http://www.hbs.edu/faculty/Publication%20Files/15-004_09b1bf8b-eb2a-4e63-9c4e-0374f770856f.pdf ).
In the meantime, we take pride in the funding needs that we have been able to address for our small business clients.
Contact us to discuss your small business financing needs to see how we can help.
