The Federal Reserve Bank of New York has published a presentation on Small Business Credit. The document indicates that small business optimism is near a 15 year high and demand for small-dollar loans (under $1 million) is robust yet these same small dollars loans have “grown sluggishly.” According to the Fed, certain small businesses struggle to secure traditional bank financing and thus are turning to online Fintech lenders to gain access to capital.
The small business survey received responses from 50 states. It tracks the fact that as business optimism has continued on its upward trajectory, meanwhile small loans by banks have been flat. Simultaneously, large loans to businesses have grown.
This appears to buttress the thesis that banks do not like to issue small business loans as they are too risky and generate insufficient revenue to justify.
Meanwhile, if you drill down further into different demographics, non-white Hispanics do the best in getting their funding needs satisfied, while non-Hispanic black or African American owned not so much.
Loans and credit cards are the most frequent forms of financing while just 7% of firms acquire equity capital. Equity funding tends to be riskier and harder to get. Securities exemptions, such as Reg D, Reg A+ and Reg CF, can be leveraged to raise capital online. But for smaller companies seeking smaller amounts of equity capital, the marketplace struggles to match cash to these businesses.
Overall, the Fed report states that the chance of being funded is a larger factor than cost where firms apply to financing. Again, online lending is shown to be a more effective path to access capital.
The Fed report is embedded below.