Just because the financial climate is warming for small businesses doesn’t mean owners are eager to take on debt. In fact, the results of a recently released survey conducted by Sageworks indicate that three out of four small business owners have never applied for a loan even though lenders have made access to credit more available.
Sageworks’ study was conducted online April 23-25 and involved responses from 286 small business owners with operations that were less than 10 years old. Respondents were not randomly selected.
Sageworks is a financial information company that tracks industry trends related to privately held companies. The firm conducted the study to find out if business owners were taking advantage of the warming credit climate.
As it turns out, many are not. Some 77% of businesses surveyed said they had never applied for a loan.
About 62% of respondents said they haven’t applied for loans because they are hesitant to take on debt. About 24% said they didn’t think they’d gain approval for a loan if they did apply and 12% felt the cost of credit was too high to incur.
Where’s the Money Coming From?
If businesses aren’t taking out loans, how are owners funding needs, especially in those crucial startup years?
The majority of participants in Sageworks’ survey – 59% – said they were dipping into personal savings to handle startup costs. About 30% said they didn’t require funding at all, and some 10.5% said family or friends helped them out.
A Look at the Lending Climate
The U.S. Small Business Administration reports that commercial lending conditions are improving. A 2013 survey conducted by the agency indicates that the number of small businesses having trouble getting credit has declined and approval rates for loans are increasing.
In 2013, small business borrowing added up to about $1 trillion, the SBA reported. While traditional loans from credit unions and banks accounted for most of the $1 trillion, small businesses also rely on other lines of credit, the SBA pointed out.
Small businesses tend to use credit cards rather heavily, a SBA report noted, with some 7% of all startup costs coming from personal and business credit cards.
Small businesses use financing for several main purposes, according to the SBA:
- Startup costs
- Inventory purchasing
- Business expansion
- Strengthening their standing
While lending approval rates are up, Sageworks’ Brian Hamilton said a little reluctance on the part of business owners to seek and accept credit is good news.
“Taking on too much debt can be harmful to a business,” he pointed out.
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