Published December 18, 2012
Small business growth was the forefront of the American consciousness in this election year, and rightly so. Startups and growing companies create the lion's share of private sector jobs, which build communities and help grow local economies. Getting the funding has become easier than it was in the dark days at the beginning of the Great Recession when even the most promising companies had difficulty securing capital.
Many of the issues debated during the Presidential Election remain relevant as we look toward 2013.
Five trends dominated the small business discussion in 2012.
SBA Boosts Small Business Lending
In 2012, the Small Business Administration had its second highest level of lending volume ever to small businesses: $30 billion in loans nationwide. The only time that the agency did more lending was in 2011 when loan incentives of the Small Business Jobs Act of 2010 helped raise SBA loans to record heights. Smaller banks, in particular, increased their activity in making SBA Loans. As the year progressed, big banks also began making more SBA-backed loans.
After Hurricane Sandy devastated the East Coast this fall, SBA Disaster Loans helped get small business owners get back on their feet. They used the funding to purchase equipment, replace inventory, make repairs and have working capital at their disposal in order to re-open their doors and rebuild their businesses. In general, Hurricane Sandy stalled small business lending as entrepreneurs reassessed their prospects of success and became reluctant to take on more debt during a time of uncertainty.
Incorporation of Technology in Small Business Lending
Small business owners are busy people; they do not have time to go from bank to bank looking for the best financing deal -- particularly during a period when banks typically reject more than half of small business loan requests. Innovative by nature, entrepreneurs turned to online platforms in the very same way that consumers discovered Amazon and other Internet retailers in the 1990s. Each month, thousands of budding entrepreneurs are applying for business loans online. By utilizing technology, they can do this late at night or on weekends when they may have more time to focus on their financing. Just as with other types of online shopping, people are also finding better deals by shopping electronically for financial products.
There are many advantages for banks to utilize technology in small business lending, often the most profitable part of their lending portfolios. I know this because the number of lenders on my company's platform more than doubled in the past 12 months. The loan officers get pre-qualified leads at no cost, and the whole funding mechanism becomes more efficient. This allows the banks to reallocate marketing dollars elsewhere and operate with leaner staff. Further, small banks can eliminate the challenges of geography by making use of the Internet.
Using social media platforms that enable friends, acquaintances and other lenders to give small amounts of money to small business owners ("crowdsourcing") gained in popularity during 2012. In fact, legislation was passed to make it easier to raise capital in this manner. Younger, tech-savvy entrepreneurs employed this way of soliciting funds and successfully secured funding for their ventures. This vehicle for raising capital that has proven effective for artists and other creative types, non-profits, and startup businesses that need smaller amounts of money.
However, crowdsourcing has limitations; companies needing more than $50,000 may have a tough time generating the amount of money they need. Additionally, professionals whose careers have an element of status associated with them -- doctors, lawyers, and CPAs, for instance -- many times do not want to be perceived as needing to collect money from friends and associates to launch or expand their practices. It can be awkward for a doctor or dentist to have his or her patient be a "stockholder" in the practice. Crowdsourcing can be effective for some types of businesses, but it is not for everybody.
The Rise of Alternative Lenders
Although big banks have increased their percentage of small business loan approvals in 2012, they still typically grant less than one out of five applications on average. Until October 2012, small banks approved less than half of small business loan requests, and then they slipped back below 50 percent in November. For the past two years, credit unions picked up the slack in small business lending and became a reliable source of small business funding. However, according to the past few monthly Biz2Credit Small Business Lending Indexes, which track loan approvals on a monthly basis, credit unions have reached their peak and are dropping in their approval rates.
Meanwhile, cash advance companies, accounts receivable financers, factors, and micro lenders all have become increasingly more attractive funders for three reasons: flexibility, use of technology, and speed.
When companies need money quickly to complete a deal, to expand or to cover short-term cash flow issues, alternative lenders filled the void in 2012. In fact, sometimes speed is more important than interest rate (as alternative lenders generally charge higher rates). Alternative lenders have been particularly beneficial for companies that have been unable to secure financing from banks, which tend to be slower and conservative in their lending practices.
President Obama's Reelection
On the campaign trail, President Obama and his Republican challenger Mitt Romney repeatedly focused on small business. Now that the President has been reelected to his second term, the owners of small companies are examining the impact of the Affordable Care Act regulations (and penalties) and the potential of tax increases for people who earn greater than $250,000 annually. The economic impact of Obamacare and tax hikes on the "rich" will be seen next year.
Hurricane Sandy and Fiscal Cliff Uncertainty
The looming "Fiscal Cliff" has caused some uncertainty in the credit markets. This has led to more scrutinized loan applications and a small pullback in approvals during November. Lenders may be less inclined to approve requested loans because borrowers' income levels may be hurt by tax increases and federal spending cuts. When government workers are laid off, they will no longer frequent the local restaurants and retailers near their former offices. The residual effect of layoffs is that they usually impact the local economy overall, not just the individuals who have lost their jobs. This is cause for concern in the economy and the reason why so many people are nervous about the automatic tax hikes and slashed spending that the legislation would impose.
Rohit Arora is co-founder and CEO of Biz2Credit, an online resource that connects 1.6 million small business owners with 1,100+ lenders, credit rating agencies and service providers such as CPAs and attorneys via its Internet platform. Since 2007, Biz2Credit has secured more than $750 million in funding for small businesses across the U.S.