There’s been much talk about a capital crunch for a while, and now there’s a study to confirm it: A lack of access to capital is hindering businesses’ ability to expand.
The Pepperdine University Private Markets Capital Project surveyed 559 privately held businesses and 1,430 lenders and investors nationwide and found that, although the majority (78 percent) of businesses had solid growth strategies, only 40 percent had access to the resources they needed to grow.
“The study shows private business owners feel they are being constrained by access to financial capital,” said survey author John Paglia. “Owners currently expect a 10 percent revenue growth over the next 12 months. If they were to receive additional capital, they estimate their revenue growth rate to jump to 25 percent.”
The survey by Paglia, a finance professor at Pepperdine University's Graziadio School of Business and Management, is unique because he interviewed alternative lenders, such as venture capitalists and private equity firms. Most surveys like this focus on one type of capital (such as banks or angel investors).
Here are some of Paglia’s findings:
- Lenders and investors reject 90 percent of loan applications or investment proposals that would be secured by a business’s real estate holdings.
- They reject 73 percent of loan applications or investment proposals that are based on a business’s cash flow.
Where are businesses getting money?
· Slightly more than 50 percent of business owners surveyed had obtained capital from friends and family for money.
· One-third had obtained bank loans.
· Approximately 10 percent had obtained financing from alternative lenders.
One worrisome finding: Despite their frustrations, most business owners are significantly more optimistic than actual conditions warrant, Paglia told the Los Angeles Times. This could prompt them to take unnecessary risks, and might mean that small businesses are in worse shape than previously thought.
Read more about the survey and get the full report at the Pepperdine University website.
My take is this: when you feel constrained by lack of capital from traditional sources, it’s time to look at non-traditional sources more closely. Look at how you can use a charge card in place of a line of credit; factoring of your invoices; grant and loan programs from your local economic development organizations; credit unions instead of banks for loans; and trade terms that will give you extra time to pay. Leave no stone unturned.