The prospect of taking on debt is enough to scare many small business owners away from pursuing a bank loan. Forbes features a new survey by Sageworks, a financial information company, which shows that a whopping 76.9 percent of those who have operated a small business for less than 10 years have never applied for a business or personal loan.
The reasons?
- 62.4 percent of respondents didn’t want to take on the additional debt
- 24.4 percent didn’t think they would be approved
- 12 percent thought the cost of credit was too high
Sageworks chairman Brian Hamilton says that 62.4 percentage is a positive sign.
“Taking on too much debt can be harmful to a business,” he says in the Forbes story. “Management starts worrying about how to pay back the loans, rather than how to really scale the business.”
So instead of the traditional route, the 286 small business owners in the survey turned to personal savings (59.4 percent) and friends and family (10.5 percent). Just 9.8 percent used a loan, and 9.4 percent used a line of credit.
According to Sageworks analyst Regan Camp, the risks involved for small businesses lead owners to seek other financial methods.
“This is their livelihood on the line — this is the family home, their transportation,” he said. “They’ve got more skin in the game than your traditional borrower, so that may be one reason they’ll try to avoid becoming a ‘slave to the lender.’”
Camp points out that time span in the survey means some of these businesses were operating during the lowest points of the recession. So a traditional loan might have been hard to come by, anyway.
But those restrictions appear to have loosened as the economy has turned around. A survey released in June by Sageworks shows that 67 percent of banking and credit union professionals expect to make more loans this year than in 2013.
“The health of these companies may indicate an ability to take on debt,” said Tim Peak of Sageworks’ financial institutions division. “There’s a possibility that banks and credit unions may be recognizing this slow but steady improvement on the income statements and balance sheets of privately held companies that are applying for loans.”
Dealing with the loan slowdown
Another snag in small businesses attempting to secure loans is the amount of time it requires. In the aforementioned survey, 9 percent of small business owners cited the “time-consuming” process involved as a deterrent.
Ami Kassar, founder of MultiFunding LLC in Pennsylvania, wrote about this “tortoise pace” recently for the Wall Street Journal.
“Banks are notorious for their lengthy loan-application processes, which often take weeks to complete,” he says. “Though the economy is in recovery mode, the recession made a huge impact on how banks deal with small-business loans. Banks now require more from applicants and they are pickier about approvals.”
The borrowers play a role here, too, however. Kassar writes that those who are unprepared during the loan process are the “primary culprit” for the slowdown.
“… If you are seeking a loan,” he says, “staying current with your accounting, bookkeeping, profit and loss statements and balance sheet is one of the best ways to accelerate the bank-loan-application process — while also relieving yourself and your loan officer of headaches.”
