February 8, 2016
Small and medium-sized enterprises (SMEs) are a major driver of economic activity in most developing and developed economies. Startups and entrepreneurial companies drive innovation and technological advances, leading to progress and higher productivity in the long run. Small businesses are also a major driver of employment.
There are about 28 million small businesses in America. The statistics suggest that more than 40% of the SMEs in the US are underserved. One the most severe obstacles to the growth of SMEs is the access to capital. SMEs are widely viewed as having more limited access to capital than large companies.
Types of small businesses in the US
The report includes an industry overview of the US SME finance industry and the rise of FinTech startups that are playing a key role in lifting up the SME financing market.
The regulatory scrutiny has caused banks to tighten their lending standards and secure more internal approvals. This, in turn, has reduced the share of creditworthy borrowers and increased banks’ fixed costs per loan, making SME loans less attractive.
Banks have traditionally been the most important providers of capital to small businesses. In recent years, bank lending has seen improvements. The loan balances for commercial and industrial (C&I) loans of $1 million or less stood at 311.7 billion by June 2015, a moderate increase of 4.63% compared to the previous year’s numbers.
In most developed markets, SMEs also rely on credit card funding for short-term liquidity needs. For one-third of small businesses, this includes business credit cards. Even more, half of all micro-businesses in the US also use the personal credit limit of the owner.
The report also talks about the different government bodies that provide financing solutions to SMEs, such as Small Business Administration Loans (SBA), Export-Import Bank Guarantees and Instruments, and Small Business Investment Company Financing (SBIC).
The report highlights the growth of alternative lending platforms in the SME lending market. In 2014, over $8.6 billion in loans were financed through online lending platforms (OLP). One element of uncertainty in the sector is potential government regulation in the future. The Web-based lending platforms are not burdened by the internal infrastructure, regulation and bureaucracy, and hence, they can offer competitive interest rates to borrowers. The alternative lending platforms are gaining popularity among SMEs and are tough competition to traditional players in the market.
Crowdfunding is one other way for small businesses to raise money in the form of either donations or investments from multiple individuals. Crowdfunding has seen nearly 145% of growth in 2015 in the United States. Initially focused on creative, philanthropic and social endeavors, crowdfunding has more recently been applied to business & entrepreneurial ventures and has expanded from donation & reward-based models to lending & equity-based models.
SME securitization is relatively underdeveloped in the US compared to real estate and consumer market segments. The growth of alternative financing platforms such as crowdfunding is limited by regulatory restrictions. Swift implementation of rules by SEC to facilitate accesses to securities by small firms and to support the development of equity investment, including investment crowdfunding would encourage SME financing.
As the US economy recovers, 2016 can be a year of further recovery in bank lending to SMEs. However, due to regulatory constraints, bank lending—especially to small businesses—is unlikely to rise significantly. Alternative sources, such as online lenders and equity crowdfunding, are well-placed to secure wider acceptance in the market, contingent on developments in the regulatory landscape.