Access To Business Capital Is Slipping, Except In Fintech

Among the most comprehensive and enlightening surveys on the state of business financing, Pepperdine Graziadio Business School just released its Private Capital Access Index for 2019’s third-quarter. The results show that, among the small business owners surveyed, a growing number are finding it more challenging to secure working capital even though demand is rising.

The quarterly report, which reflects the responses of several hundred U.S. business owners whose annual revenues are less than $100 million, tracks the demand for and availability of capital financing between banks, credit unions and, increasingly, online lenders, as well as the business expenses they serve.

Demand Up, Access Down

The topline datapoint in the Q3 report is the surprising uptick in private capital demand among small businesses that, along with a modest decline in access rates among respondents, led to the biggest demand/access gap the survey has seen since 2017.

The surge in demand is surprising, especially given the economic uncertainty that has plagued business investing among larger firms. However, this quarter saw the highest concentration of demand among respondents ever registered by the index as well as a majority of respondents indicating that the current business financing environment is restricting their ability to grow or hire new employees.

These results are interesting in light of the responses the survey received about the primary source of credit for companies that borrowed capital over the previous quarter. Among the eight sources respondents received financing from, only two showed a quarterly increase in the percentage of respondents who borrowed from them: online lenders and “other.”

This shift toward online lenders is unsurprising for fintech lenders like Credibly, which specializes in small business financing.

“I wouldn't be surprised if this is, in part, due to fear of a looming recession,” said Jeffrey Bumbales, Director of Marketing & Strategic Partnerships at Credibly. “We've noticed a large increase in demand for lines of credit specifically, so perhaps business owners are ensuring they have the controls they need to stabilize their working capital in the event of a downturn.”

The uptick in demand comports with Credibly’s own rate of financing applications, which is up nearly 15% over the last quarter. Although, according to Bumbales, the increase has occurred steadily throughout the past 12 months

Lending In 2020

Despite the clear demand for capital, some CEOs and investors are still harboring economic anxiety as they head into the final stretch of 2019. However, the Pepperdine survey provides some indication that, in spite of the uncertainty, small businesses are eager to grow.

For one, annual revenue projections from the survey are higher overall at about 11% growth. Smaller firms (<$5 million in revenue) generally anticipate having a better year with an average anticipated growth of 12% growth, whereas larger firms ($5-$100 million in revenue) were slightly less optimistic with projections of about 7% growth.

However, the more convincing signal on small business bullishness is the percentage of companies who expect to apply for additional financing in the next six months. A full 39% of respondents indicated they would seek funding between now and the first quarter of 2020, the highest rate in the survey’s recent history.

“The last quarter is big for our space in general,” Bumbales explained. “After all, many companies need additional capital in order to ensure success during the critical holiday season.”

While plans might change along with economic conditions, the current signal from the small business world is that they want to expand. The sustainability of the current borrowing environment will ultimately boil down to whether Main Street’s confidence will buck Wall Street’s fears.

Credibly is a content partner of Benzinga