Kevin Banahan operated his Brooklyn-based skateboarding academy as a side gig for years, renting space from another business. Eventually, he and his partner decided the academy had grown strong enough to merit its own location.
When Banahan’s local bank wouldn’t grant him a loan to establish a physical space for SKATEYOGI, due to his lack of collateral, he applied for financing through Lendio’s marketplace. Banahan received a loan of about $35,000 from American Express that was based on his business credit card sales.
“We probably spent about $50,000 on our buildout,” he shares. “The Amex funds were pivotal. We’ve been in our space for three years, just past the anniversary of the lease signing.”
SKATEYOGI may have started as a weekend business, but it has grown into an employer and part of the community. Banahan and his partner have stepped away from day-to-day teaching to become managers of a staff of around five people.
Capital is essential for small business growth, and based on a Lendio report released last month, more and more business owners are seeking out loans. Demand for small business loans increased 43% over the previous three-quarter average, according to the quarterly SMB Economic Insights report. Business owners in 40 states took out more loans during Q3 than the previous three quarters. While there’s a lot of talk about the next recession, there aren’t many signs that show the economy is trending in that direction. The business ecosystem looks healthy and optimistic.
Entrepreneurs are seeking other options
This data could also portend that many business owners are looking more toward debt financing to satisfy their business growth needs, rather than the pipe dream of equity financing, such as venture capital (which disappointedly remains out of reach for women and many minority business owners).
“Entrepreneurs have been coached and trained by investors to believe that’s the one true source of funding,” says Bryce Roberts, founder of Indie.vc and managing director of OATV, both of which attempt to bridge the gap between equity and debt financing. “Equity is a more exclusive club and entrepreneurs are getting smarter, so they are seeking other options.”
Equity financing has been focused on fewer companies, with 1,304 deals completed in Q3, the lowest of the past eight quarters, according to PwC and CB Insights’ Q3 2019 MoneyTree report. Yet still, Q4 2018 saw the highest funding record of all time. The top three areas for VC money are the Bay Area, New York and Los Angeles. But what about all the businesses between the coasts looking for smaller amounts of funding?
Roberts said it makes sense that equity investors focus on huge deals—that’s their model.
“Are you building a business that can return the investment of the firm? What are their expectations? Can you deliver that in a five- to seven-year timeline?” he said. “If you’re developing a product that has a longer R&D window where you can’t be selling to satisfy debt, that usually leads to equity being the preferred model. What kind of company do you want to build? Equity has a cadence of successive fund raises to a march toward an exit.”
Many businesses do not meet these criteria, and where companies that do take on equity financing go wrong is using that capital for predictable expenses, such as Facebook ads. On the other hand, businesses should avoid using debt financing as if it’s equity, because there are strict payback periods.
“My stump speech is not that venture isn’t a fit for most companies, but we haven’t really designed any other risk capital,” Roberts said. “You have this hammer of risk capital these days—venture capital—that’s being applied to use cases that weren’t designed for it.”
Challenges remain, but more options are available
To be sure, there are still challenges with debt financing. According to LexisNexis data cited by Business Insider, only 54% of surveyed business owners with revenues of $100,000 or less said they had sufficient access to capital. Among these business owners, only 24% applied for a loan in the past three years, compared with 53% of businesses with revenues over $500,000.
The reasons for these statistics? Most business owners, 66% of those surveyed, said they believed they wouldn’t be approved. The data backs up their assumption: 47% of smaller business owners have been rejected for loans in the past three years. A major concern among business owners is a lack of business credit history, but as Banahan of SKATEYOGI shows, there are other types of loans these business owners can seek.
This also may explain why, according to the Lendio report, a larger portion of business owners under 44 years old are seeking financing online, which offers more options than traditional methods. Roberts adds that it makes sense for millennials and gen Zers to seek out loans on the internet.
“If you look at the move of that demographic toward more sustainable, calmer and less blitz-scale growth, that makes a lot of sense,” he says. “They’re looking to pair their life with their business, and venture only affords one lifestyle. By taking on debt, it leaves them in more control of their destiny.”
That was the case for Banahan, 40, who said he and his partner want “to be able to steer the direction” of their business. The pair are once again looking at debt financing for expansion. Over the summer, they applied for a loan from the Small Business Association.
“We’re looking at a second location in central Brooklyn on a pop-up basis,” he said. “The loan was the necessary first step to even entertain that. We’ve done the math on what we think we can generate. We’re definitely optimistic.”
While it remains difficult for many entrepreneurs to receive the funding they need to grow their businesses or keep them afloat, the rise of more options could provide some relief. No matter the path they take, business owners should educate themselves on all of their options to find the right funding to fit their needs.