A recent report from the Private Capital Markets Project at Pepperdine University shows that both investors and business owners appear to be cautiously optimistic about the direction of the economy, although financing remains tight. About three-quarters of bankers, 55 percent of asset-based lenders, 69 percent of factors, and 53 percent of angel investors forecast improving business conditions over the next 12 months.

On the other side of the table, more than half of business owners, when assessing the past 6 months, said that their revenues had increased, and 63 percent had greater opportunities for growth.

The report, prepared by senior researcher John Paglia, an associate professor of finance at the university, is an exhaustive (150-some pages) look at the deals under way at a range of lenders and investors: bank loan officers, angel investors, factoring firms, and PE groups, to name a few.

Some highlights:

Cost of capital: Not surprisingly, business owners looking for money will find cash flow loans, assuming that they qualify, the cheapest route by far. The median rate for a $10 million cash flow loan was 5.5 percent; that compares with 6.3 percent for an asset-based loan, and an expected return of 25 percent for PE groups. Financing by factoring was most expensive; respondents reported gross annualized rates of 39 percent for $5 million. To be fair, however, three-fourths of factoring arrangements last a year or less, and most close within several weeks.

Bankers: While bank loans may be the least expensive, they’re not easy to come by. The 56 bankers responding to the survey declined 73 percent of applications for cash flow loans, 47 percent of collateral-based loans and a whopping 90 percent of real estate-based loans. What kept businesses from getting funds? For one-fourth, the quality of their cash flow came up short, in the bankers’ estimation. Similarly, the quality (or lack thereof) of earnings was a deal-breaker for about 21 percent of loan applicants.

What’s more, these numbers actually represent an increase in deals accepted; half of the lenders said that the percentage of borrowers approved had risen over the past 6 months, although 22 percent said that it had declined. Similarly, 56 percent of lenders said that the credit quality of prospective borrowers had increased over the past 6 months, while 22 percent indicated that it had gone down.

Still, at least a few businesses seem to be finding lenders willing to deal with them. Just over one-third of business owners said that banks were part of their current financing structure. This was second only to Mom and Dad; 56 percent had some financing from friends and family.

Asset-based lenders: It appears that the tight market for bank loans may have prompted more business owners to try their hand with asset-based lenders, 60 percent of whom reported an increase in loan applications over the past 6 months. When it came to the credit of prospective borrowers, 44 percent indicated that it had declined; just over one-fourth thought that credit quality had risen.

So, it’s not surprising that a majority of loan applicants were KO’d: Asset-based lenders declined 65 percent of receivable-based, 77 percent of inventory-based, and 69 percent of equipment-based applications. The number one reason? Insufficient collateral, which was mentioned by 30 percent of AB lenders.

Private businesses: More than 550 business owners participated in the survey; about 90 percent had revenues of less than $25 million. At the same time, most expect their numbers to grow; the median expected revenue growth rate was 10 percent, but this number jumped to 25 percent if the companies could access growth capital.

Interestingly, the business owners were asked what types of financing their firms would qualify for, as well as the percent of businesses overall that they thought would qualify for different forms of financing. More than half thought that their firms would qualify for bank loans or infusions by private investors. When it came to all of the businesses out there, however, the typical respondent thought that just 20 percent would qualify for bank loans, and that just 5 percent would qualify for a PE investment.

That sounds something like the mythical Lake Wobegon, where all the kids are above average. Of course, if business owners didn’t feel that their enterprises were a cut above the competition, they’d have no incentive to venture out in the first place. ###