Main Street Monday – Why Small Business Lending Isn’t Rising Equally Across the United States

December 17, 2018

By Mary Miller
Contributing Editor, Main Street Monday

Main Street Monday – Why Small Business Lending Isn’t Rising Equally Across the United States

While small businesses in the top 10 states have seen lending numbers rise consecutively for the past seven months, others have not fared as well. This trend reported in PayNet’s recently released Quarterly Credit Outlook.

Overall, the small business lending market remains strong, with the index up 2% year-to-date. With a slight index decrease at the end of Q3, it signals the possibility of future, albeit small, risk. If the top 10 states are performing well in the small business lending market, what factors are contributing to a weaker lending trend in other states?

By looking at individual state’s culture and economics, there are factors that point directly to why small business lending puts some states into a lower ranking success bracket. They include:

  1. State Economics / Cost of Living / Amount of Discretionary Income
  2. Supply & Demand for Products or Services / Accurate Market Analysis
  3. Solid Business Plan / Leadership / Projections and Growth
  4. Lack of Capital / Securing Capital

According to Investopedia, here are the four most common reasons why new businesses fail.

The biggest reason for failure to launch or sustain any small business boils down to obtaining capital. While many entrepreneurs try to finance their start-ups with their own funds, loans from family/friends or cashing in personal assets, securing funding, if only in perception, appears to be the biggest roadblock to starting or succeeding over time in a small business venture.

New business loans can be risky and by region, lending institutions must also assess the risks when underwriting these loans. Since the level of risk is determined by the application score after review by the lending institution, it can vary, good or not so good for the applicant, by region.

For new entrepreneurs, fear of going into debt or lack of knowledge about SBA loans or other alternatives to conventional financing is also a prohibitive factor to launching a small business.

While an SBA loan can be a promising alternative to a conventional loan from a local bank, the applicant must still be accepted by the lending institution to move forward.

When starting a new or expanding an existing small business, providing accurate revenue figures, plans for future growth, history of performance (or projected performance) and personal assets are taken into consideration.

In states where there are drawbacks to starting a small business due to lack of demand, economic reasons or high risk, not all states will experience the same rising growth in the small business lending market.

For a ranking of best states for starting a business, see WalletHub’s comprehensive post here.