How Can a Small Business Access Low Cost Capital?

Small business optimism continues to edge up as the halfway mark of 2017 approaches. To gauge confidence, the 2016 Small Business Credit Survey presented data from interviews with more than 10,000 small business owners across America. Most firms expressed positive expectations for 2017 similar to those they held for 2016 with a net 61% expecting revenues to grow.

However, that same survey shows less-than-rosy thinking. Expectations to secure a business loan are modest: only 19% of firms expect to increase their debt level in 2017 while 34% percent of firms increased their debt level in 2016. If fewer firms borrow capital in 2017 versus 2016, business growth could decrease as Injections of low-cost capital—when it’s needed—help strengthen businesses and, in turn, the overall economy. According to data from the SBA, small businesses account for 99% of all businesses, 48% of private sector employment, and the majority of net new job growth. Forget Google and Facebook, the little guys are most important.

There are discernable reasons for the reluctance to seek outside funding. Access to low-cost capital can be difficult if businesses don’t look in the right place. “Small business lender” might conjure up an image of a local banker and an entrepreneur sealing a deal with a friendly handshake. It’s no secret: many banks don’t want to say ‘yes’ to a small business seeking capital to grow.

Frustrations about approvals and slow bank loan processes can drive business owners—even those with high credit scores—to take advantage of fast capital from alternative lenders. While this strategy can temporarily alleviate cash flow issues and business owner stress, funds often come at a steep price with unfavorable payback terms.

Terry Trumbull needed additional funding to keep up with demand for his food delivery service and sought out a fast and flexible solution. Self-financed for years, the Michigan business owner looked to alternative sources and ultimately took out a short-term loan requiring daily payments. “That really hurt my cash flow and it wasn’t helpful in reaching my overall financial goals,” he said.

When business owners seek funds from a traditional bank, they may hit other barriers as well. Like many, Claudia Gee, owner of Amazing Balloons by Gee in Southern California, found it difficult to secure the relatively small loan size she wanted from her bank. “I felt that it was hard for the banks to take us seriously because we didn’t want a million dollar loan,” she says.

There are reasons for this. Underwriting and origination processes and costs for most banks for a $200,000 loan are about the same as a $2,000,000 loan. So, it’s no surprise that most bankers look for more lucrative larger deals and shun the smaller one’s. Most banks find that loans less than $250,000 simply aren’t profitable.

Even if a bank is willing to finance smaller loans, approvals are often difficult and borrowers are understandably discouraged with the time it takes to complete an application and get funded.

“I tried to get funding locally at two banks and we were rejected,” says Ariya Burana, co-owner of Sugar Twist Bakery in Bakersfield California. “The third bank we tried approved us but the process took too long. It was a waiting game.”

The good news is that fintech companies are creating innovative solutions that can help answer the demand for access to low-cost small business funding. By partnering with banks to enable them to make smaller loans profitability through technology enhancements, fintech companies are enabling banks to say “yes” to small business owners. Small businesses are benefiting and are able to access capital in faster and easier ways with rates and terms that result in very low monthly payments.

These fintech and bank partnerships can come in many forms, in both the front and back office. For example, there are various technology providers in the marketplace that do everything from automating banks’ underwriting processes to helping to manage the customer experience.

So where is the low cost money for small business owners? The answer isn’t just online—it’s through innovative partnerships—like those between fintech companies and banks—that continue to evolve and shape the lending landscape.

Author: Evan Singer is President of SmartBiz and leads the strategic, operational and tactical activities of the company. He has broad experience in both financial services and consumer industries.  Evan has held leadership positions as Chief Revenue Officer at Milton’s Baking, President at Purity Organic, and General Manager at Align Technology.  He started his career at Procter & Gamble and holds a B.A. in Public Policy, graduating with honors from Stanford University.