Small businesses thinking outside the capital box

Lending has been on the rise, but it’s not from the traditional sources

As 2013 comes to a close, many small business owners are wondering, “Will I be able to get the financing I need next year to manage my expenses and growth opportunities?”

At this time last year, the outlook was still pretty grim. While the economy was growing moderately, many lenders, especially banks, were still reluctant to provide financing for the average small business.

Getting a bank loan still appears to be a major challenge for most small businesses. While banks are still the first stop for most small businesses in search of financing – 60 percent, according to a recent study by Pepperdine University – only 27 percent succeed in securing it.

Fortunately, small business owners are extremely perseverant. Despite the agonizingly slow thaw of bank financing, they’re seeking capital from many different sources, successfully obtaining loans, and managing the payments. While outstanding loan balances for small businesses are growing rapidly, delinquencies on these balances are shrinking, according to a recent Experian survey.

The fact that small businesses are even seeking loans is great news. Given recent events, small business owners have become more conservative with their finances. So this new activity signals a meaningful bump in their confidence level. They’re not going to seek capital without a strong belief that it will empower them to execute on their opportunities and that the debt they’re taking on will lead to positive ROI.

We’re seeing very positive data at Direct Capital as well. Our monthly Small Business Lending Demand Index, which synthesizes data from 200 sources, saw demand increase steadily across the first 10 months of this year. In October, the index registered small business lending demand at its highest point since we began measuring it in January 2012. Year to date, lending demand is up 25 percent over 2012. Demand remained strong in November, and based on historical data, we’re confident this momentum is real and will continue through at least the first quarter of 2014.

Looking to 2014, here are some additional trends that will likely affect the small business financing landscape:

• New credit models: New and existing lenders are looking at more data points than ever in an effort to approve small businesses for financing. In the past, a small business owner’s FICO score was basically the driving force behind most lenders’ credit decisions. That’s changing rapidly. Bank balances and credit card receivables are two data points that can now be used to drive more loan approvals. So-called “third scores” are also emerging that weigh in to the credit decision, e.g., a restaurant owner’s Yelp rating or size of their Twitter following.
   
• Crowdfunding: New legislation passed by Congress will enable unaccredited investors to provide capital to small businesses for all types of needs in the form of debt or equity investments. More and more crowdfunding websites are emerging to connect small businesses with these investors without a lot of red tape.
   
• Rising interest rates: Most lenders expect that the current low-rate environment is likely to change over the next 12 months. This is an important consideration for small businesses as they try to find the appropriate time to invest in their growth.

While all of these trends will likely affect the outcome as businesses search for capital, what should not change is the level of due diligence that goes into the search.

Small businesses should focus in on their need for capital and make sure they spend time identifying the best financing option based on that need.

For example, if you are seeking financing for an equipment, technology or commercial vehicle purchase, explore options that will be more cost-effective than an alternative “non-bank” loan that is based on your bank balance or credit card receivables. By talking to multiple lenders, you’ll get a strong understanding of the options available to help move your business forward.

Steve Lankler is senior vice president at Portsmouth-based Direct Capital.