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To Borrow or Beg: Small Business Funding in 2015

By Betsy Scuteri
Business.com / Finances / Last Modified: February 22, 2017

As capital becomes more accessible again, small businesses are continuing on their growth trajectory for 2015. Here's how they're doing it.

In 2013, small business borrowing amounted to about $1 trillion—$585 billion in business loans outstanding, $422 billion in credit from finance companies and the rest from a mix of sources. As capital becomes more accessible again, small businesses are continuing on their growth trajectory for 2015. 

Share financing by category

Source: SBA.gov. Note: Total small business loans are defined as all loans outstanding under $1 million, including SBA loans. Finance company lending consists of all business receivables outsanding.

As a recap from our previous article, small businesses in the U.S. employ the majority of the nation’s private workforce with 56.1 million people. Compared to the 51.6 million employees in the enterprise sector, these figures alone show how impactful small business employment is on our economy and people.

To See The Results of These Studies and More, Download Our                                                                                                               State of Small Business in America Report Now

Financing and cash flow management are huge concerns for small businesses, particularly because they are more vulnerable to distractions and bankruptcies than their fellow big guy counterparts. Commercial banks have eased their lending conditions and terms, though it’s still relatively tight compared to pre-recession conditions.

Related: HR Issues Affecting Small Businesses in 2015

While only 29% of small business owners said they’ve applied for a business loan over the last two years, 90% of those who applied for a loan were approved. In addition, nearly a quarter (24%) of all small business owners surveyed plan to apply for a loan in 2015.

Still, only 24% are planning to apply for a loan this year. 

If less than a quarter of small businesses are applying for a loan, where are they getting additional financing and funding? About one-third of new non-employer firms and 12% of employer firms use no startup capital at all. In the past seven years since funding almost literally dried up, people got resourceful. 

Alternative Lending and Self Funding

The shift in perspectives where small businesses are turning to friends and family and alternative financing looks like it is here to stay. In fact, those Millennial owners (44%) are more likely to use personal retirement savings to fund their operation than their Boomer (12%) and Gen X (12%) counterparts.

In addition, personal sources of funding now rival commercial loans, a 39% increase from 2012, according to The Hartford Finanacial Services group

Personal funding

Data Information: The Hartford Financial Services group

"We are seeing more interest in crowdfunding perhaps as a way to get under the lens of a larger spotlight for a VC loan," says Christine Kymn, Chief Economist at SBA.gov. "This reward-based funding is a way for them to signal they have a quality product."

Related: The State of Small Business

Since the FCC hasn't finalized the rules in terms of reward-based funding platforms such as Kickstarter, or others, it's still very much a viable option for many businesses. More minority-owned and women-owned firms have also been trending to reward-based funding to build social capital. 

To See The Results of These Studies and More, Download Our                                                                                                               State of Small Business in America Report Now

Credit Cards 

Credit cards are still an option to small businesses, although it is still a very small option. Only roughly seven percent of all startup capital is derived from credit cards. It appears that from our survey, credit cards are mostly used for cash back to manage cash flow.

"Imagine you could get one percent off on all your expenses. By using a credit card, we get a one percent cash back on payments we make with our credit card," says Michael Conway, our CFO here at Business.com. "We also get an additional 15 to 45 days to pay that credit card bill which helps manage cash flow."

Credit cards financing

What Does This Mean for Small Business Owners?

Now Is the Time for a Loan. With 90% of small businesses getting approved for loans in the last year, it couldn’t be a better time to apply for the capital your business needs. Research national and local banks to find the best fit for you. Additionally, explore new venues of loans, like Square Capital. 

Tap Crowdfunding for Exposure and Cash. Alternative lending options have grown in popularity, largely because of their marketing power in addition to the more obvious funding opportunity. Learn how to attract investors with these tips. If you are considering starting a reward-based financing company, or already in the business, now is a good time to seriously spend some cash on promoting, brand positioning, and demand generation. 

Use Credit Cards Responsibly. As if you didn't know already, but beware of your interest rates, hidden fees and rewards in order to keep your business in healthy financial standing. More importantly, make sure you have the best card for your business. It's good to re-evaluate each year to see if there is another card that better fits your needs and offers more cash back.  

To See The Results of These Studies and More, Download Our                                                                                                               State of Small Business in America Report Now

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