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Low interest rates and an improving overall economy, on the surface, should lure businesses to borrow and spend. But gains in new jobs and consumer confidence are being overshadowed by tighter lending conditions.
Data and experiences of small-business owners instead point to small businesses largely still on the fence about accessing capital to generate growth and add jobs.
Business owners broadly are more worried about speed bumps like red tape and taxes—not access to capital.
In the latest optimism index reading from the National Federation of Independent Business, only 6 percent of business owners said all their credit needs were not met—up 2 points from the historic low.
Plus, only 2 percent reported financing was their top business issue compared with 21 percent who cited taxes, 22 percent who pointed to regulations and red tape, and 14 percent who cited weak sales.
"Interest rates are low, but prospects for putting borrowed money profitably to work are not great and so loan demand remains weak among small-business owners," the NFIB said in a statement. And overall, capital spending remains in "replacement mode," not expansion mode.
U.S. Small Business Administration loans, meanwhile, have been recovering steadily. SBA loans for 2014, through the end of September, totaled $19.2 billion, up from 2012 and 2013 levels, but on par with $19.6 billion in loans recorded in 2011. Three years after the global economic crisis, pent-up demand pushed entrepreneurs to seek capital for needed repairs and replacement of equipment.
SBA loans are government backed and available through commercial lenders, which use their own criteria to assess creditworthiness and extend credit, while abiding by SBA guidelines.
Additional data show lukewarm demand for capital among smaller companies.
Private demand for capital fell 6.2 percent during the third quarter of this year, according to Pepperdine University's Private Capital Access Index, done in partnership with Dun & Bradstreet Credibility, a global business insights firm. And about 42 percent of small-business owners surveyed said the current business environment is holding them back from growing.
To be clear, consumer confidence did rebound in October to a seven-year high. But some business owners say the ability to easily access loans remains challenging, and is eclipsing gains in consumer confidence.
Small companies are shying away from borrowing because they think they simply won't get a loan, said Jeff Stibel, chairman and chief executive of Dun & Bradstreet Credibility. "Small businesses are saying, 'Look I can't get a loan, so I don't want a loan,'" Stibel said.
Just ask Steve Rennekamp, president of Energy Swing Windows, based in Murrysville, Pennsylvania.
Rennekamp said post-recession banking restrictions have made lending conditions tougher. And with the economy not yet in full swing, he says seeking out a loan seems more trouble than it's worth.
"We talked about borrowing last year, but it's even harder for a contracting company—we make and sell our own products to homeowners, so it's not like dealing with other big businesses," Rennekamp said.
Overall, lending is "steady, but not robust," said Ann Marie Mehlum, associate administrator for the Office of Capital Access at the SBA.
Mehlum added the overall economic mood seems to be save more—and spend less.
"The trend now [for consumers] is more saving and less spending, which is harmful in the short run to Main Street and the economy," Mehlum said.
Some business owners, meanwhile, are edging into acquiring capital.
Instead of opting for a full loan, Patrick Martins, owner of Heritage Foods in Brooklyn, New York, turned to a line of credit.
The direct-to-consumer food wholesaler has 40 employees nationwide including farmers and butchers. Martins said he gets a $250,000 annual line of credit from TD Bank as a "lifeline."
"We are the primary source of income for 30 families in agriculture," Martins said. "It's very helpful to us as security."
Martins added he would be comfortable taking out a loan, but he doesn't see the need with his line of credit. Plus, a low interest rate environment has "no effect" on his business decisions.
"Low rates have nothing to do with us," Martins said.
Stibel of Dun & Bradstreet Credibility added low interest rates are being overlooked, and that small companies are instead turning to alternative lenders with looser standards, shorter terms—but much higher rates.
"They have interest rates of between 9 percent and 20 percent," Stibel said. "They have alternative criteria, so they can actually lend to small businesses. And they're shortening the terms of loans, and the interest rates being so high means they can handle default rates," he said.