Investment Banking

Small, Midsize Firms Favor Bank Loans for Capital Needs

Nearly 80% are unfamiliar with crowdinvesting and other new avenues for private financing.
Matthew HellerMay 15, 2015
Small, Midsize Firms Favor Bank Loans for Capital Needs

Banks dominate the financing space for small and middle-market firms that raise capital, reflecting in part the comfort level most businesses feel with their borrowing rates, according to a new survey.

The Milken Institute and the National Center for the Middle Market, co-authors of the survey, found that close to half of firms with revenue of $10 million to $1 billion have used a bank loan to raise capital in the past three years, and roughly one-third of small businesses rely on bank loans.

After bank debt, the most popular financing option was debt issued in a private offering, with nondebt options such as equity preferred by very few firms. Less than one-third of firms were aware of nontraditional capital sources other than private equity.

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The survey used a sample of 636 business owners and C-suite executives to gauge how small and middle-market firms raise capital. A perhaps surprising number (32%) have not raised capital in the past three years and approximately 40% do not anticipate raising outside capital in the next three years.

Of those firms that favor bank loans, 53% indicated that their borrowing costs are around the prevailing market rate, with a further 28% believing that they pay less than market rate. More than three-quarters of respondents considering a bank loan cited strong previous relationships with the bank as a reason for pursuing that option.

Only 5% of small and midsize businesses surveyed have used U.S. Small Business Administration programs within the last three years. Reasons for not participating include a difficult or bureaucratic process, lack of awareness, and onerous program terms and requirements.

As far as future capital-raising, just 19% of small and midsize businesses intend to take on additional debt to fund expansion in the coming year. Forty-four percent said they planned to finance growth with cash on hand, followed by existing credit facilities (31%).

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