Here’s another reason why the little guys should stick together: Small businesses say it’s easier to get a loan from a smaller lender, a new report says.
Plus, owners are usually more satisfied when dealing with smaller banks, credit unions and community development financial institutions (CDFIs).
That’s according to the latest Small Business Credit Survey from the Federal Reserve.
In the third and fourth quarters of 2016, researchers asked more than 10,000 small companies about their need for financing.
Among their findings:
- For employer firms with less than $1 million in annual revenue, the approval rate at a small bank was 60 percent, compared to 45 percent at a large one.
- Even so, small businesses were more likely to seek help from a large bank: 49 percent said they applied at a large institution, versus 42 percent who contacted a smaller bank.
- Smaller companies were more open to trying an online lender. About 26 percent of the “under $1 million” respondents said they sought financing online, compared to 12 percent of businesses with more than $1 million in revenue.
- The approval rate at online lenders? About 59 percent. But the net satisfaction rate was a meager 27 percent, compared to 75 percent at small banks and 46 percent at large banks.
- Most employer firms – 61 percent – encountered some kind of financial challenge last year. About 45 percent say they sought funding to pay for operating expenses. That’s up from 37 percent in 2015.
- The No. 1 way to solve those financial problems: dipping into the owners’ personal funds, an approach used by 76 percent of respondents. Other options included downsizing, delaying payments or taking on additional debt.
- When small businesses do apply for financing, owners’ personal credit is often a big factor. About 42 percent of small businesses said their owners’ personal credit scores were “exclusively” used to secure a loan.
- The owners’ personal scores and the business credit scores were used in the applications for another 45 percent.
- Lenders consider owners’ personal finances even when the company has annual revenue over $1 million. About 25 percent of these companies said their owners’ credit scores were “exclusively” used to win financing. About 53 percent said both personal and business credit scores were part of their financing applications.
