According to Cynthia Kay, vice-chair of advocacy for the National Small Business Association (NSBA) and president of Cynthia Kay and Company, a media company based in Grand Rapids, Michigan, access to capital is one of the largest impediments facing America's small businesses. "Even in the best of times, it hinders both aspiring and thriving entrepreneurs," she said. "In fact, the small business members of NSBA consistently identify access to credit and capital as one of the top issues impacting their firms. This comes at a time when small businesses believe the economy is improving, and they are willing to take on additional debt in the form of financing."
In July 2013, 65 percent of NSBA members responding to a survey reported that they were unable to obtain adequate financing for their businesses. By December 2014, that had increased to 69 percent.
One of the biggest barriers to small business financing, said Kay, is a requirement that debt be secured by equity in fixed assets. "Many small and startup businesses lack the kind of equity necessary for traditional bank loans," she said. "The gap in debt equity financing especially hinders startup and growing businesses, as these entrepreneurs typically do not have the assets necessary to acquire sizeable loans."
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She added: "When I started my business, the only way to get a loan was to sign a personal guarantee using the equity in my house. I did that several times over the years to obtain capital. This perennial problem is only exacerbated during troubled economic periods, such as those many businesses are still experiencing today."
Another barrier to access to capital for small businesses is that banks often shy away from the small business community in general. "Smaller loans are generally less profitable for banks and typically have higher default rates," said Kay. "Additionally, the proper valuation and creditworthiness of small businesses are notoriously difficult to determine." Compounding the problem is the fact that ongoing bank consolidation has led to fewer community banks and fewer character-based loans, which has limited the ability of small businesses to get financing. In fact, according to Kay, small business loans have steadily been declining. "In 1995, small loans represented 40 percent of bank loan dollars. Today, that is only 23 percent," she said.
According to a recent NSBA survey, almost two-thirds (61 percent) of respondents report that their businesses have been impacted by the credit crunch. And although the number of firms that report being affected by the credit crunch has dropped slightly (61 percent at the end of 2014, compared to 69 percent in mid-2013), one-third of small firms still struggle to get the financing they need.
Still, small business owners continue to find themselves in debt. The average debt of NSBA survey respondents in July 2013 was $835,828. By December 2014, that had increased to $933,985.
So where are small business owners getting the money? The current capital vacuum has forced a lot of small business owners to use personal credit cards and their own business earnings to finance their businesses. "There is a noticeable jump in the number of small firms that rely both on credit cards and earnings from their business," said Kay. "These two are the most quickly accessed forms of financing."
According to the recent NSBA survey, 36 percent of respondents reported using credit cards to finance their businesses, 35 percent reported using earnings from their businesses, 20 percent reported getting community bank loans, and 19 percent reported using vendor credit. Only four percent used credit union loans, and only three percent used Small Business Association loans.
The struggle to obtain financing continues to cause problems for small businesses. For example, more small business owners report that a lack of financing is hindering their ability to finance increased sales or increase inventory to meet demand. "Nearly one in five small firms cannot meet increased sales demand due to an inability to garner financing," said Kay. In addition, according to NSBA data from as far back as 1993, there is a clear correlation between a small business owner's ability to hire employees and his/her ability to get financing.
In specific, when asked what the effect of lack of capital availability has on their businesses, 34 percent of NSBA survey respondents reported being unable to grow their businesses or expand their operations, 18 percent reported being unable to increase their sales, 16 percent reported having to reduce the number of employees, 13 percent reported being unable to increase inventory to meet demand, and 11 percent reported reducing benefits to employees. (Percentages could exceed 100 percent, since respondents could cite more than one effect.)
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