Small businesses (<$5 MIL in revenue) reported increased ability to secure capital, with success rates increasing across all categories in the second quarter of 2018. Businesses also saw their profitability grow according to the Q2 2018 Private Capital Access Index (PCA Index) from Pepperdine Graziadio Business School and Dun & Bradstreet. However, these increases did not result in heightened confidence about future growth or improved business performance.
Fifty-two percent of small businesses were successful in securing a bank loan in Q2 a 27% increase over Q1 when 43% were successful. Loans from credit unions/community development financial Institutions (CDFIs) were up 18.5% (from 27% in Q1 to 32% in Q2), and investments from venture capital and private equity were up 58% and 150% respectively (venture capital rose from 12% in Q1 to 19% in Q2 and private equity rose from 10% in Q1 to 25% in Q2).
Business profitability saw similar increases in Q2, with 61% of businesses operating profitably, an increase of 9% year over year, and 5% quarter over quarter (57% of businesses were profitable in Q2 2017, and 59% were profitable in Q1 2018).
“The improved private business financing success rates, particularly with equity, are consistent with what we have seen recently in the private equity and venture capital markets,” said Dr. Craig R. Everett, director of the Pepperdine Private Capital Markets Project. “There is a lot of investor money in those markets that desperately needs to be deployed. Many deals that would have been less attractive to investors in previous years are now getting funded.”
Although profitability and borrowing success rates are up, this has not led to increased expectations for business performance or growth. Only 27% of businesses expect to perform substantially better than last year, a 23% drop from 35% in Q1 2018, and a 25% year over year drop from 36% in Q2 2017. Similarly, only 42% of businesses are confident that they will grow this year, down from 47% in Q1 2018 and down 12.5% from 48% in Q2 2017.
The number of businesses planning to raise financing in the next six months was also down significantly, falling to a two year low. Only 29% of businesses expect to raise financing in the second half of this year, down from 34% in Q1 2018, and 36% in Q2 2017.
“Although this period is marked by high access to credit and financing, as well as increased profitability, businesses are being cautious about growth expectations,” said Bodhi Ganguli, lead economist at Dun & Bradstreet. “Midterm elections in the US and global uncertainly around trade agreements and tariffs are likely leading businesses to rein in expectations and investment, despite favorable trends.”
The PCA Index is a quarterly indicator produced by the Pepperdine Graziadio Business School and Dun & Bradstreet. The Q2 2018 Index report was derived from 1,313 completed responses collected between April 3 – April 20, 2018.
Download the latest index data here http://bschool.pepperdine.edu/accesscapital