Pepperdine University Graziadio School Study Shows Nearly 48% of Private Business Owners Focus on Securing Bank Loans; Banks Deny Majority of Loans Due to Increased Regulatory Pressure
–71% of Business Owners Report Not Turning to Friends and Family After Being Denied a Bank Loan Thwarting Expansion Efforts
LOS ANGELES –Today the Pepperdine Private Capital Markets Project (PPCMP) revealed results from their Summer 2011 report showing that approximately 48% of the 1,221 privately-held businesses that responded to the survey are targeting bank loans as a source of funding, followed by friends and family (21%) and private investors (11%). Despite the increased desire among private businesses to secure bank loans, banks are denying the majority (60%) of loan applications. Sixty-one per cent (61%) of banks who responded to the survey say that because of increased pressure from regulators they are declining loans that otherwise would be accepted.
“Privately-held business owners favor bank loans among all types of capital because they are typically the cheapest and banks are generally passive investors,” said Dr. John Paglia, lead researcher of the Pepperdine Private Capital Markets Project and associate professor of finance at Pepperdine University’s Graziadio School of Business and Management. “Banks on the other hand report feeling increased pressure from regulators to avoid making risky loans and because of that they are denying loans that otherwise would have been accepted. The result is that small business owners are left without access to capital.”
Despite the high rate of banks declining loan applications, 71% of private business owners who responded to the survey said they did not seek friends and family financing after being denied from a bank loan. Privately held businesses often rely on credit cards for financing and 81% of respondents said that after exhausting credit card resources they did not seek funding from friends and family.
This is in contrast to past iterations of the study in which friends and family was a significant source of funding for business owners: in the Fall 2010 report almost 35% of respondents reported friends and family as a current source of financing and in the Winter/Spring 2010 report 56% of privately-held businesses highlighted friends and family as a financial source.
“The question then becomes where do small business owners turn for funding?” continued Paglia. “With friends and family becoming seemingly tapped out, small
businesses may continue to target bank loans, hoping that regulatory pressure eases.”
Other key findings:
- Angel Investors reported that the types of businesses that they plan to invest in over the next 12 months are very diverse with more than 17% targeting software and another 11.7% planning to invest in clean tech.
- 27% of Venture Capitalists who responded to the survey ranked access to capital as the number one emerging issue facing private businesses. 16% of respondents indicated government regulations and taxes were the number one emerging issue for private businesses.
- 82% of respondents in the Private Equity industry see the demand for business investment increasing over the next 12 months. Over the next 12 months, 37% of respondents see general investment standards increasing, 43% see average investment size increasing and 47% see appetite for risk increasing.
With over 99% of companies being privately-held our economy is dependent upon the success of these businesses. The Pepperdine Private Capital Markets Project is a critical step along the path of understanding and increasing the value of private companies and our economy. Professionals who work in the lending or investment arenas either for an institution or a specific fund are excellent bellwethers of what is ahead for other businesses and consumers. Through two survey cycles and published summary reports per year, lenders, investors and the businesses that depend on them will be able to make optimal investment and financing decisions, and better determine where the opportunities to create lasting economic value may be realized.
The study is available at: http://bschool.pepperdine.edu/privatecapital.