Small and medium-sized enterprises (SMEs), firms with fewer than 500 employees, are the backbone of U.S. economy. They make up 99 percent of all firms, employ over 50 percent of private sector employees, and generate 65 percent of net new private sector jobs. SMEs account for over half of U.S. non-farm GDP, and represent 98 percent of all U.S. exporters and 34 percent of U.S. export revenue.
To thrive, SMEs need access to credit and cash flow. Credit conditions for SMEs deteriorated drastically in the wake of the financial crisis. However, even if not matching pre-crisis levels, SMEs’ loan availability improved notably in 2014. Small business owners are also more optimistic than a year ago about their economic prospects and the availability of credit. Venture capital investments also recovered significantly in 2014, and were particularly robust for companies seeking expansion capital.
This TradeUp White Paper deepens on the state of SME finance in the United States in 2015. We review trends in lending and equity financing to SMEs, discuss emerging financing sources for SMEs, and assess the future of SME finance in light of the rise of alternative, online lenders and crowdfunding platforms. We also analyze the specific financing issues faced by SMEs that seek growth through exports.
The summary highlights of this report are as follows:
- Bank lending to SMEs has improved, but has yet to return to pre-crisis levels. In December 2014, the latest date for which data is available, the loan balances for commercial and industrial (C&I) loans of $1 million or less stood at $302.6 billion, $34 billion below the levels of June 2008 preceding the Great Recession.
- Business owners appear more upbeat about their funding prospects than a year ago. In the January 2015 Wells Fargo/Gallup quarterly survey of 600 small business owners, 34% of respondents stated that it was somewhat or very easy to obtain credit over the past 12 months, up from 28 percent in January 2014.
- Federal government sources have played a complementary and to an extent countercyclical role during the past few years in SME lending. In FY 2014, the Small Business Administration (SBA) supported $29.6 billion in lending to small businesses, with its 7(a) loans topping the levels of the prior two years. The Export-Import Bank supported export credit insurances and export working capital for SMEs at $5.1 billion in 2014, somewhat below authorizations in 2011-13. SBA-backed Small Business Investment Company (SBIC) financings increased to $3.4 billion in 2013, the latest year for which data are available and a five-year high.
- Several online lending platforms have sprung up in the wake of the recession to offer small businesses relatively quickly disbursing credit, typically for loans of less than $250,000. According to estimates, online lending platforms loaned record $8.6 billion in 2014.[i] One element of uncertainty in the sector is potential future government regulation.
- In terms of venture capital investments, 4,356 deals received $48.3 billion in 2014, highest since the dot com boom of 2000, according to the MoneyTree™ Report by PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA). Internet and software deals dominated. Expansion-stage deals received the greatest amounts of investment, while early-stage deals dominated the number of deals.
- Angel investment has become a strong complement to venture capital. In the first two quarters of 2014 for which data are available, angels invested a total of $10.1 billion, an increase of 4.1 percent over the first half of 2013.
- Crowdfunding, which enables companies to raise donations, debt, and equity from individual and institutional investors, gained steam in 2014. According to recent estimates, the global crowdfunding industry has grown explosively to nearly $10 billion in 2014 from $1 billion in 2010. Some estimates put crowdfunding at $500 billion in 2020.
As the U.S. economy recovers, 2015 can be a year of further recovery in bank lending to SMEs. However, due to regulatory constraints, bank lending especially to small businesses will unlikely rise above pre-crisis levels. 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. While there are concerns about a new Internet bubble that would undercut VC investments, evidence so far indicates these concerns may be overblown.
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