In general, small businesses have a more difficult time obtaining credit than their larger counterparts. One reason is that default rates are higher in the small business loan market, especially given the fact that small businesses fail at a higher rate than larger businesses. Another reason is that it is often more difficult for lenders to evaluate small business loan applications, since there is often not a lot of publicly-available information on their businesses. In addition, small business financial statements are not always very detailed, and, in many cases, owners often mix their business finances with their personal finances.

According to a report published by the National Federation of Independent Business (NFIB) in January 2012, “Small Business, Credit Access, and a Lingering Recession,” 16 percent of employers with zero to one employees had a business loan, 22 percent with two to four employees had a business loan, 37 percent with five to nine employees had a business loan, 41 percent with 10 to 19 employees had a business loan, 51 percent with 20 to 49 employees had a business loan, and 57 percent with 40 to 250 employees had a business loan.

While these numbers may partly be explained by the fact that it is more difficult for small businesses to obtain loans, a lack of need for loans may also be a reason for these numbers. That is, very small businesses simply may not feel the need to apply for bank loans to run their businesses. They are often more comfortable using credit cards and other more easily-accessible sources of capital

In fact, in a recent report published by LegalShield, “Small Business Survey 2014,” small business owners listed “loans from banks” as the sixth most common source of capital for their businesses (18%). More commonly, they use personal savings/money (46%), past profits or retained earnings (37%), business credit cards (33%), personal credit cards (22%), and lines of credit from banks (22%).

General economic uncertainty can also play a role in how easy or difficult it is to access capital. According to the 2014 Pepperdine Private Capital Markets Project (PPCMP) Report, nearly every industry sector in the private capital markets reported that economic uncertainty is the biggest current or emerging issue facing privately-held businesses. “The cost of economic uncertainty on the private capital markets and privately-held businesses is nearly incalculable,” said Craig R. Everett, Ph.D., author of the PPCMP report. “However, we know there is a correlation between economic instability and access to capital. If private capital market providers are anxious, they may hold their pursestrings tighter, which will limit access to capital for businesses that desperately need additional funding to grow.”

However, as noted earlier, some research suggests that the lack of available capital does not pose a problem for small businesses in specific these days. According to the “September 2014 Small Business Economic Trends,” published by the NFIB, only four percent of small business owners reported that all their credit needs were not met, which is equal to the record low. Twenty-eight percent reported all credit needs being met, and a record high 55 percent explicitly said that they did not want a loan. In addition, only two percent reported that financing was their top business problem, compared to 24 percent citing taxes, 19 percent citing regulations and red tape, and 13 percent citing weak sales. “This is the most favorable reading about credit market conditions since 2006, occurring at a time when the Federal Reserve is terminating its aggressive QE3 policy,” said William Dunkelberg, chief economist for the NFIB. (“QE3″ is the third round of “quantitative easing” announced by the Federal Reserve.) “Interest rates are low, but prospects for putting borrowed money profitably to work are not great, and so loan demand remains weak among small business owners.”

These observations are also confirmed by LegalShield's “Small Business Survey 2014,” which found that, overall, small business owners reported less interest in using virtually any sources of funding for their businesses. For example, the use of the number one source of funds for respondents, “personal savings or personal money,” declined from 51 percent in 2013 to 46 percent in 2014. The use of the second most common source, “past profits or retained earnings,” declined from 40 percent in 2013 to 37 percent in 2014. In addition, the sixth most common source, “loans from banks” declined from 19 percent in 2013 to 18 percent in 2014. Overall, virtually all other funding source activities showed a decline from 2013 to 2014.

This seems to be a reversal from recent years past, though. In June 2013, for example, a survey conducted by the American Sustainable Business Council found that 45 percent of business owners who took part in the survey said that access to loans and credit at reasonable rates was a problem for their business.

And the report published by the NFIB in January 2012, “Small Business, Credit Access, and a Lingering Recession,” cited earlier, noted that the inability to obtain credit was the third most frequently-cited finance issue. The report noted, “A disconnect appears between lenders and small business owners. Lenders think credit standards have not changed or have eased over the year. Small business owners think they have tightened.” The report also noted that the number of small business owners possessing a business loan (not including credit lines or credit cards), fell noticeably between 2008 and 2011, from 44 percent to 29 percent.

So, it seems, at least for the present time, even though access to capital remains tight, this doesn't seem to be a problem for most small businesses, given that their need for capital seems to be lower at this point than in the past.

Instant Insights /

Small business loans: tight, but not problematic

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