WANTED: Successful Business Owner Still Needs Business Loan, Interested Lenders Please Call – by Ed Davis, CPA, CVA

 

“All we want are the facts ma’am, just the facts…”

                                         Detective Joe Friday, Dragnet

Sometimes our blog is packed with meaningful general information and sometimes, we prefer a Joe Friday fact-based version. This month, we feel a little “scrappy,” so we’re going with our version of Joe Friday, focused on the current trends for demand and access to capital markets for owners of smaller, privately owned businesses.     

The crime: Private business owners are in a cash crunch position and lenders are missing opportunities.

Question ma’am (Joe Friday “speak”): We think that’s true. So, what are the lenders, the ones with the money, doing about this? 

The history:  

      • 2009:   Community banks could “borrow from the fed window” at lower rates
      • 2010:   A Small Business Lending Fund was established to provide capital to community banks
      • 2011:   Big banks commit to increase their lending to small businesses by $20 billion over the next 3-years (really, 3-years?)

 Question ma’am: Sounds reasonable. So how’s it all working out for the business owners, the ones who need the money?

 According to 2Q survey results published by Dr. John Paglia of The Graziadio School of Business, Pepperdine University:

      •  75%  believe the current market is difficult for raising capital
      •  44% of those who applied for loans were successful; 56% were not
      •  41% business owners are using personal assets to finance their business
      •  the indexes used by Dr. Paglia (PCA and PCD…access and demand) are 27% and 36.5% respectively. Note: it’s generally   believed that when the index is 50% or higher, the capital market is stable/stabilizing.

Next question ma’am: So, did the above mentioned initiatives failed?  

Not sure but it’s suggested that:

  •  Lending rules/programs have changed and banks have not done a good job of telling business owners what they are
  •  Lenders need to do a better job of sharing information among themselves and find new ways to streamline the lending process
  •  Banks need to operate with more transparency – ex publish the minimum thresholds needed for loan approval.

Last question ma’am: Why you care about the stability of the credit market? 

It’s really simple Detective Friday: the ability to sell or grow my business depends on access to stable capital markets with deal and lending terms and conditions that work for all parties. It’s really that simple.

 

About the Survey:

Dr. Paglia researches capital markets for small privately owned businesses and has created two indexes to “measure demand for, activity and health of private capital markets designed to gauge the financing issues for small businesses.” The indexes are referred to as the PCA (Private Capital Access) and PCD (Private Capital Demand)

 

  • The results are divided in two layers: businesses with annual revenues of less than $5M and those with revenues of $5M – $100M.
  • The higher the index value, the greater the access to capital, or demand for capital (depending on which index you are looking at). A value of 50% or more can be interpreted as a relatively high capital access or high capital demand.
  • Types of businesses included in the survey:

a.       Gross revenues:

                                                             i.      58%  – $1M or less

                                                            ii.      20%  – $1M-$5M

                                                           iii.      22%  – over $5M

b.      Age of business:

                                                            i.      39%  – 20 years or more

                                                           ii.      24%  – 10-20 years

                                                          iii.      15%  –  5-10 years

c.       Number of employees

                                                            i.      56%  –  5 or less

                                                           ii.      44%  – more than 5

  

Specific Survey Results for 2Q 2012:

 

 Demand for Financing by Purpose and Size

  

Business  Size   

GrowthIncluding  

Acquisitions

WorkingCapital Growth ByDemand To FinanceWorsening

Conditions

RefinanceExisting Loans

Or Equity

WithdrawWealth for

Owners

           
<5M 

63.1

62.4

53.9

42.6

37.8

26.2

5M-100M 

68

59.6

51.9

32

38.1

30.1

 

 

 

 

 

 

 

Strength of Demand for Financing (Ranking of 1 to 4, 1=Slight and 4=Extremely High) 

  

Business  Size  

GrowthIncluding  

Acquisitions 

WorkingCapital  Growth ByDemand  To FinanceWorsening

Conditions 

RefinanceExisting Loans

Or Equity 

  

Withdraw

Wealth for

Owners 

<5M 

2.5

2.2

2.2

2.2

2.5

2

5M-100M 

2.3

2.1

2.1

2.1

2.3

2

 

 Respondents Indicating High and Extremely High Demand for Financing

  

Business  Size   

GrowthIncluding  

Acquisitions 

WorkingCapital  Growth ByDemand  To FinanceWorsening

Conditions 

RefinanceExisting Loans

Or Equity 

WithdrawWealth for

Owners 

<5M 

47.5

37.9

35.8

39

47.9

29.2

5M-100M 

41.8

31

30.2

32

38.6

28.1

 

Is the Current Financing Environment Restricting the Following?

(% respondents indicating “Yes”) 

  

 

Business Size  

Business

Growth

Opportunities 

Ability to

Hire New

Employees 

<5M 

64

55

5M-100M 

47

34

 

 % Respondents Indicating Demand for New Financing in Next 6 Months 

  

Business  Size  

GrowthIncluding  

Acquisitions 

WorkingCapital  Growth ByDemand  To FinanceWorsening

Conditions 

RefinanceExisting Loans

Or Equity 

WithdrawWealth for

Owners 

<5M 

60

58

54

37

36

24

5M-100M 

64

63

60

38

37

25

 

Strength of Expected Demand for New External Financing in Next 6 Months

(1-4, 1=slight and 4=extremely high) 

  

Business  Size 

GrowthIncluding  

Acquisitions 

WorkingCapital  Growth ByDemand  To FinanceWorsening

Conditions 

RefinanceExisting Loans

Or Equity 

WithdrawWealth for

Owners 

<5M 

2.5

2.3

2.2

1.8

1.9

1.5

5M-100M 

2.4

2.1

2.1

1.5

1.8

1.5

 

The capital markets for small businesses have changed and are changing very quickly.  We know from experience … we have several lenders we work with on a regular basis and are in constant contact with them.  If we can help, give us a call.