The smallest businesses have the hardest time accessing bank financing, finds a CFIB report that also shows many small business owners are using their own personal assets as additional sources of financing.
“Small businesses face considerable barriers based on their size when they apply for bank financing,” says CFIB president Dan Kelly. “While there has been much buzz about fintech and online lending in general, what small business owners want most from their bank is a personal relationship based on mutual understanding.”
Crowd-funding still has a long way to go before it’s seen as a viable source of financing for small firms, as only 0.1% of small businesses say they’ve relied on this source of funding.
Firms with fewer than five employees are nearly six times as likely to be rejected for a loan than mid-size firms (50-499 employees). The overall rejection rate for small and medium businesses is 15%, with wide variability in rejection rates between different banks.
“The Small Business Banking Code of Conduct is pretty clear: banks must not only explain why they rejected a loan application, they must also provide information on alternative sources of financing,” noted Kelly.
In addition to bank credit, many small business owners rely on their own assets for additional sources of financing: 49% relied on personal equity; 30% used a credit card.
The report found that half of small businesses had applied for credit financing from banks over the past three years; the median amount of financing approved was $150,000, with the smallest businesses being approved for $50,000.
For those who are approved for loans, smaller businesses then face higher interest rates, paying an average of 2 percentage points above the prime rate. The rate is even higher for the smallest of businesses, who paid 2.28 percentage points above prime.