Study by Pepperdine University and Dun & Bradstreet Indicates Small Business still dependent on Personal Resources, Friends & Family.
Even while new forms of finance are on the rise, small business still struggles to find capital necessary to fund growth. While SME access to traditional bank loans is rising, small businesses still lag behind middle market companies pushing them to rely on personal credit and networks. This is according to research by Pepperdine University Graziadio School of Business and Management and Dun & Bradstreet and their Private Capital Access Study.
According to their numbers, small business (defined as having revenues of under $5 million. Mid size businesses are $5M to $100M) have experienced a 13% increase in access to capital since Q2 of 2012. At the same time, as of Q2 of 2016, personal funding remained entrenched as the main option for credit. The Private Capital Access Study shows that 34% of smalls transferred personal assets to their business in contrast to 13% of mid size businesses providing personal credit. The leading types of personal assets small businesses relied on for capital in Q2 were personal savings (72%), personal credit cards (45%), and cash from sale of personal assets (19%).
- 77% of the small business respondents qualified for personal credit cards for financing in the last three months,
- 70% qualified for business credit cards
- 68% relied on friends and family
- 38% of small business respondents qualified for a bank loan within the last three months, compared to 70% of mid-sized businesses.
The study also reports that crowdfunding is emerging as a major alternative source for small businesses seeking capital as 19% of small businesses sought financing via crowdfunding during Q2 in contrast to 7% of mid-sized businesses that utilized crowdfunding.
Jeff Stibel, vice chairman of Dun & Bradstreet, explained they began the study four years ago just as the economy was attempting to right itself from the grips of the Great Recession.
“Since then, we have seen steady progress for small businesses being able to acquire the capital they need, although the financing is still predominantly not coming through traditional lenders,” stated Stibel. “It will be interesting to see how the new option of crowdfunding will affect small businesses as our study has shown more eagerness to use that option as compared to their mid-sized counterparts.”
Interestingly, the study also reports that demand for capital is down Among small businesses, demand dropped sharply between Q1 2016 and Q2 2016 (38% versus 32%), while for mid-sized businesses, demand decreased from 23 percent in Q1 to 21 percent in Q2. Since Q2 2012, the demand index among small businesses has dropped 19 percent (39 points versus 32 points) and 37 percent among mid-sized businesses (32 points versus 21 points). The study authors say the economic climate for small business remains uncertain. The tepid economy is reflected in the report as 52% of small business respondents indicated that the current business financing environment is hindering their businesses’ growth opportunities, compared to 33% of mid-sized businesses in Q2 2016. 56% of small business respondents in Q2 2016 indicated a desire for financing in the next six months for planned growth or expansion, compared to 41% of mid-sized businesses.
Dr. Craig R. Everett, Director of the Pepperdine Private Capital Markets Project, said current borrowing habits could show some businesses do not see a need for capital.
“However, these findings suggest business owners are still feeling the lasting impact of the recent recession and remain skittish about the future, as reflected in an abundance of caution when it comes to the economic environment,” said Everett.