One of the biggest issues faced by many small businesses during the economic downturn is the tightening credit market. Finding capital financing for a small business remains a big challenge as banks tighten lending criteria and reduce their exposure to the small business sector.
In fact, according to the National Small Business Association in their 2008 Survey of Small and Mid-Sized Businesses , about 55 percent of their survey respondents have experienced difficulty in securing financing for their businesses. The credit crunch is more acute for businesses with 5 or less employees, with 35 percent indicating that they cannot get adequate financing compared to only 15% of businesses with 20-499 employees.
During the period of recession, the most commonly used sources of financing for small businesses are:
- Credit cards – 44%
- Earnings of the business – 36%
- Bank loan – 28%
- Private loan (friends or family) – 19%
- Vendor credit – 15%
- Leasing – 5%
- Small Business Administration loan – 5%
Credit cards may be an expensive source of funds, but well, it is the most accessible and easiest to get. Thus, it is no surprise that credit cards are the only source of financing that did not decrease between 2008 and 2007. It is not uncommon to find small business owners to be in credit card debt up to their eyeballs. Credit cards may not be the wisest route to financing a business, but surely beats reading rejection letters from banks.
I have experienced first hand how it is to labor day and night crafting what I thought to be a great business plan, only to be rejected by the bank for not having any collateral. I was one of those who mistakenly believed that banks are willing to give you money if you have an outstanding business idea, even though you don’t have any equity investment or collateral. That experience proved to me that you need money in order to make money. So just like many other entrepreneurs, I had to use my plastics to fund the business.
(Original post – November 28, 2007)