A survey from the Federal Reserve Bank of New York found traditional lending institutions aren’t doing enough to improve access to working capital for small businesses. Although loans of $1 million or more have grown, smaller loans have not become more available despite improved economic circumstances.
Roughly 52 percent of companies reported applying for a business loan in 2013, with 30 percent of those firms doing so to expand their business operations. The numbers indicate businesses aren’t just looking to cover standard expenses, but actually make an investment in their future growth potential. And with small businesses pushing for greater market share, banks’ lending criteria for these companies should align with the goals of the overall small business sector. Not only does small business benefit, so too do average workers and the nation as a whole, as the majority of people in the U.S. are employed by small businesses.
The survey also noted businesses are having to apply for loans multiple times before being approved – roughly three times on average, spending more than 33 hours in total. Lending also continues to be more available for experienced companies compared to those businesses that haven’t been in operation as long, which puts newer businesses with high potential at risk of becoming stagnant and lacking funding.
The findings purport small businesses could benefit from streamlined lending guidelines and greater investments. Here are a few ways that faster capital lending can help promote the well-being of small business:
More immediate access to capital
The No. 1 reason small businesses stand to gain from faster lending is the immediacy and availability of funding they need. Working capital that is difficult or impossible to obtain provides no advantages to small businesses. Even if a lending process can be cut from three days to two days, the rewards are plentiful for those firms that require greater funding.
Because many small businesses operate with tight margins, every day that lending is delayed is an opportunity lost to their competitors. By knowing increased capital will be coming in, businesses can plan ahead and budget properly, making them more efficient and better able to handle economic downturns or seasonal slumps.
Removes biggest obstacle to growth
As evidenced by the survey, funding isn’t always easy to come by, especially for businesses that may not have adequate assets or collateral to offer. In addition, business owners with poor credit histories and limited upfront capital can find it even more difficult to secure the type of loans they need to improve their companies.
In many cases, the only thing restricting future expansion of the business is the lack of funding. This obstacle essentially creates an immovable barrier in front of business plans and can make it nearly impossible for small firms to afford new equipment, hire more workers or expand into new regions. This further limits employment opportunities for workers and creates unnecessary challenges for the economy as a whole.
With faster lending, businesses can make decisions more quickly and improve their operations, fueling growth.
Improves competition among businesses
Because of the large disparity of capital availability among small and large businesses, the playing field in some markets is hardly even. This puts firms with less working capital at a severe disadvantage because without the necessary loans, they will fall further behind their competitors in market share.
Additionally, when fair competition is not a part of the economic landscape, smaller firms aren’t able to flourish to the degree they may have otherwise done had they been approved for loans more quickly. Larger companies tend to have more contacts, better credit reports and larger assets, which make the lending process all the more easy for them. On the other hand, small businesses don’t necessarily have these same qualifications, and as a result, face a much harder path toward profitability.
With smaller, faster and more customized loans, small businesses are likelier to compete in any given market with larger firms, which makes products and services as a whole more efficient and economically viable.