Survey Reveals Private Capital Demand On The Rise, Small Businesses Increasingly Turning To Fintech For Financing

Despite fears of slowing growth, it seems small businesses have not lost their outlook for expansion, and a greater number are turning to alternative lenders to achieve it. 

That’s according to the latest edition of the quarterly Pepperdine Private Capital Access Index, which surveyed 848 small and medium-sized businesses (SMB) in the United States on the current and projected need for external financing, as well as its accessibility. 

Capital Fuels Growth And Stability

Overall, the survey revealed that both the demand and accessibility for external financing grew over 2019’s second quarter. Demand for financing showed the strongest quarter-over-quarter growth among small businesses with less than $5 million in revenues, while demand among those with between $5-$100 million in revenues was high, but generally flat compared to the first quarter. 

The primary sources for this funding came from large or regional banks, while online lenders and trade credit represented the next tier of funding sources. Notably, online lenders were most popular among the small business segment of those surveyed.

The reasons behind the financing could account for part of this popularity among growing businesses since expansions in operations and fluctuations in working capital were among the primary reasons companies sought financing.

This aligns with what SMB fintech lender Credibly has seen among its lending applicants.

“Along with an increase in overall funding applications, we have noticed an increased percentage of business owners using the capital to cover operating expenses and preemptively pad their working capital,” said Gary Bailey, SVP of New Originations with Credibly. 

However, despite the rise in lending need and accessibility, 2019’s second quarter saw a significant decline in the success rate for those seeking loans from traditional banks. The drop was felt by companies across the board. However, smaller firms were disproportionately affected, seeing a 28% reduction in successful borrowing from the previous quarter, its lowest drop level since 2016.

Fintechs Say Yes

In the midst of this slowdown in traditional loan approvals, the ratio of financing applications to online lenders surged from the previous quarter from just under 20% in the first quarter to 28.8% in the second. This increase was most pronounced within the small business demographic.

According to Credibly, the uptick in interest and the relatively high approval rate among small business fintech lenders is no surprise. The financial and analytic infrastructure that underlie fintechs like Credibly has allowed them to better understand the financial profile of a broader cross-section of businesses to deliver financing tailored to each business’s specific lending profile and financial needs.

“Our proprietary scoring model has already proven to be best in class at managing risk for stable, consistent, and predictable results,” said Credibly Founder and Co-CEO, Ryan Rosett.  “And on top of working to continuously refine the strength of our model, we have partnered with a select handful of external lenders to ensure there are no gaps in our product coverage.”

The Next Six Months

Looking ahead to the rest of the year, SMB owners remain optimistic about their growth prospects in spite of broader fears of an economic slowdown setting in as 2020 approaches. 

Among all of the businesses surveyed, 34% expect to seek additional external financing over the next six months. Again, small businesses are far more intent on pursuing extra capital, with 35% looking to generate extra funding as opposed to their mid-sized counterparts, only 28% of which plan on applying for more capital.

The primary expected source for this financing remains bank loans. However, along with personal credit cards and trade credits, 29% of respondents will look to fintech lenders to provide monetary fuel for their next round of growth.  

Credibly is a content partner of Benzinga