05 Feb State Of Small Business and Working Capital Needs (5-Part Series)
Part 1: The State Of Small Business and Working Capital Needs in Texas Growth Industries.
Part-one of a five-part series focusing on The State of Small Business in 3 Texas growth industries; Healthcare, Retail and Food Services, and their credit needs to support expansion and operations. Series concludes with an overview of how online lenders have stepped in, Funders & ISO’s alike, to provide the funding to close the credit gap in support of Small Business working capital needs.
The founders of Accord Business Funding have been financing Texas for almost 5 decades. Recent comments from Mike Ballases, Founder, spoke to the changing nature of traditional banking, challenges to small businesses and meeting the small business credit gap.
“Over the last 40 years, we have seen the banking industry evolve thru consolidation. Today, 1/3rd of banks that existed 40 years ago are still in business. In addition, the cost of customer acquisition continues to increase as does the cost of supporting small business loans. As a result, traditional banks are less inclined to support local small business, especially funding request less than $250K, which is around 75% of all small business lending request. The Alternative Finance Industry has stepped in to fill the credit gap.”
Recently, the Federal Reserve released the 2017 Small Business Credit Survey (SBCS). The survey involved 12 Federal Reserve Banks which gathered perspectives on small business decisions, outcomes, and financial needs. This information is very important for ISO’s and Funder’s as they identify credit gaps and develop meaningful working relationships to meet the working capital needs of small business. The findings of the survey provide a clear look at the credit experiences, debt holdings, and the performance of small businesses across the country. In addition, the Harvard Business School Working Paper, The State of Small Business Lending: Innovation and Technology and the Implications for Regulation, provides additional context to the Federal Reserve Survey. With reference to the 2017 Small Business Credit Survey, this article will look at the overall business environment and outline growth expectations, financing shortfalls, and financial challenges of firms across the country.
Going into 2018, the survey showed that businesses reported stronger revenue growth and increased profitability, and some of the businesses experienced continued financial challenges. Generally, the survey shows:
- Improved business performance in 2017, and increased optimism for employment and revenue growth in 2018.
- Reduced demand for new financing, with a small number of companies applying for new financing than in the previous years and half of the non-applicants reporting that they had enough financing.
- An improved financing success for applicants, with a bigger number of applicants getting the whole amount that they requested and higher success rates for line of credits and loan applicants as compared to 2016.
- A modest increase in the number of applicants seeking financing from online lenders, with the highest application rates being with self-reported medium and high-credit risk companies.
- Continued financial issues. A majority of the financial challenges were wages and operating expenses, and also credit availability for some companies, especially recent credit applicants, startups(0-5yrs) and micro firms with $100k in revenues or lower per year, and businesses in the hospitality and leisure industry.
A majority of the businesses reported that they were profitable and their revenues were growing in 2017. The net share of the businesses reporting employment growth, revenue growth, and profitability increased from the levels of 2016. The expectations for employment and revenue reached an all-time high since 2015. Approximately 66 percent of the businesses anticipated increased revenue for 2018, and 44 percent of the businesses expected that they would hire more employees in 2018. The increase in business performance has resulted in less demand for existing firm financing, however, in Texas, the strength of the economy has resulted in a brisk increase of new small business entering the market and a need to establish credit relationships to fund business operations and growth.
Decreased Demand for Financing