The Hidden Small-Business Credit Crisis: Fear of Applying

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We all know that small businesses got turned down for loans more often during the recession -- especially newly formed businesses. But it's been a mystery how many business owners weren't even bothering to apply. Without that figure, it also wasn't clear how much pent-up demand for credit was really out there.

A new study from the Ewing Marion Kauffman Foundation finally gives shape to the problem that dare not speak its name the past few years: How many entrepreneurs were afraid to even try to get a loan

A startup entrepreneur has to have a certain level of confidence to go into a bank and apply for a loan. In 2009, that confidence flagged badly, the Kauffman Firm Survey showed.

More than 20 percent of the nearly 5,000 firms surveyed said they didn't apply for loans that year because of fear of being turned down. Another 5 percent said they held off looking for private equity financing for the same reason. Their biggest challenge to getting credit was slow and/or lost sales, with 44 percent citing this as their primary problem. The runner-up was "unpredictable business conditions," which 22 percent of respondents named their top challenge.

If they didn't approach banks, how did entrepreneurs fund their businesses through the downturn? The survey showed about half the owners went into personal debt in 2009 to keep their business afloat.

"These firms clearly continue to feel the effects of the financial crisis in terms of lost sales and inability to obtain needed funding," Kauffman vice president of research and policy Robert Litan said in a statement on the study's release. "To promote job creation and strengthen the economy, entrepreneurs must be able to access financial capital to expand investments in research and development, and other growth strategies."

It'll be interesting to see the data for 2010 -- Kauffman plans to continue its data-collection project on new business ownership through this year. My gut tells me the fear of applying for loans has lingered straight into 2011. Once you've been hit with something like the economic crisis we've just experienced, it can take a while to get over it and regain your confidence.

Where did you find capital for your business during the downturn? Leave a comment and tell us your story.

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