Entrepreneurs looking to invest new funds into their companies’ growth or expansion may be in a good position to borrow, raise, or partner their way to more capital in the year ahead.
With consumer spending projected to grow by 2.5% in the U.S. in 2020 and interest rates low (and expected to stay that way for some time), conditions are largely in small businesses’ favor. The U.S. Chamber of Commerce’s Small Business Index even reached an all-time quarterly high in Q4 of 2019, with 69% of SMBs saying they are in good health and 59% reporting optimism for the future.
In addition, changing headwinds around what a good investment looks like may be beneficial for small business entrepreneurs when it comes to funding. An enhanced focus on financing women and minority-led businesses, as well as shifting attitudes around tech investments, may create new openings for companies to access capital.
Small businesses have never had it easy when it comes to capital formation. Banks have tight standards for commercial loans, and venture capitalists tend to seek out high-growth investment targets (with a bent toward experienced founders with track records of exits and returns).
Reaching that kind of entrepreneurial track record is a rarity. Thriving small businesses tend to stay private, and many fail fairly quickly. According to a government study, of all U.S. small businesses started in 2014, only 56% made it to their fifth year.
Financiers and other stakeholders across industries increasingly recognize, however, that cash flow problems are a significant driver of startup and small business challenges and, too often, their failures. Injecting more capital into the small business landscape—and making it easier to access—can reduce failure rates and improve entrepreneurs’ chances of reaching profitability.
To that end, the Securities and Exchange Commission (SEC) sought feedback last year on ways to harmonize securities exemptions to inject more capital into early-stage businesses. The SEC’s Small Business Capital Formation Advisory Committee is also working to “examine how entrepreneurs’ diverse capital needs are being met and where policy solutions may be needed," such as adapting the “accredited investor” designation that limits who is eligible to invest in private ventures.
As that work continues, it will help inform and expand on several rising areas of progress and opportunity in the small business financing landscape.
Making Funding Progress in Underserved Groups
A clear area of need—and of growing attention—is the allocation of capital to entrepreneurs in historically underserved demographic groups, such as the women and minorities engaging in more new business creation than ever.
Between 2014 and 2019, the number of women-owned businesses climbed 21%, while all businesses increased by only 9%. The number of firms owned by women of color grew at double that rate (43%). This increase in startup activity is helping women bring more leverage into the financing environment, but they are not yet able to capitalize on the opportunity at full value.
Analysis by the SEC found that women are less likely to apply for bank loans, for example, despite research finding no differences from men in their approval rates.
Making those loans easier to apply for may help make a difference for women. To that end, the National Development Council recently launched an online loan application process geared toward minority and women business owners. (Minority entrepreneurs are still up against systemic problems, though, as they remain three times more likely to be denied loans.) When designed properly, online applications and metrics-based, “by-the-numbers” evaluation processes can be more beneficial to women capital-seekers.
This is especially true in venture capital, where gender-blind practices can help mitigate the impact of women’s underrepresentation among investment decision-makers. (Only 15% of senior investment teams in venture are gender-balanced, and nearly 70% are all male.)
The fact that women-led companies ultimately deliver higher revenue than those founded by men—more than twice as much per VC dollar invested—helps make these metrics-based evaluation models fairer. In all contexts, it also helps better women’s negotiating position with potential equity investors and other partners, both now and in the years ahead.
In fact, certain seeds of change being planted in finance right now may start influencing institutional investments in women- and minority-led businesses fairly quickly. Institutions like Goldman Sachs are making leadership diversity a prerequisite for taking companies public, pointing out having diverse leadership supports a “significantly better” performance.
Shifts in Technology
This rising commitment to boardroom diversity also comes at a time of shifting sentiment about technology, which could pose benefits to entrepreneurs outside that industry who are seeking institutional capital.
A solid majority of the American public (59%) now says Amazon is bad for small businesses, for example, and rising scrutiny of tech companies’ business practices (and, often, their inflated numbers) has many VCs and observers revisiting traditional expectations of venture investment targets and floating new methodologies and funding models.
The shift may create an opening for savvy small business entrepreneurs to gain more access to VCs and other institutional investors looking to diversify into less traditional areas. Given broader uncertainties about financial markets and the economy, equity investors may be more open to investments outside their traditional areas, such as in small businesses capable of growing and thriving long-term.
The Future of Small Business
Small businesses play a crucial role in the U.S. economy, and their success is vital to keeping unemployment low. Gaining more funding for their goals is a key way entrepreneurs can set themselves up to win the future—even as shifting headwinds reshape our idea of what that future might look like.
If growth or expansion is on your small business roadmap, working with a business banking partner to discuss your goals can be a smart place to start.