Banks are pulling back on loans. Small businesses are looking elsewhere. (Courtesy of the Jacksonville Business Journal) — Michael Pugh, president and CEO of Harlem, New York-based Carver Federal Savings Bank, has seen how rapidly rising interest rates, higher prices and a ceiling on what they can charge has put pressure on small-business owners in his community and made it more challenging for many banks to lend.
“The credit box for many financial institutions has become tighter because of the rising interest-rate environment. Banks in general are being very careful that they are making safe and sound decisions when it comes to credit,” Pugh said. “For small-business entrepreneurs trying to get access to credit, it’s a bit more challenging.”
At Carver, which is a certified minority deposit institution and a Community Development Financial Institution, the bank has partnered with a financial-technology firm to create its own credit score to better serve business owners, taking into account factors such as rental payments, utility payments and bank statements to help decide on loans — loans that, so far, have a 100% repayment rate. But he has also heard of business owners that sought out alternative lenders as well, and worries many could get caught in a cycle of high interest payments.
He encouraged business owners to seek out smaller lenders within their communities, particularly CDFIs, for access to credit, but also a more holistic set of help that is often overlooked by larger financial players.
“CDFIs are uniquely qualified to understand the needs of small businesses and work closely with them. I would encourage any entrepreneur to develop that relationship,” Pugh added.
Pugh’s advice comes as small businesses are worried about getting loans, with 76% saying in a recent MetLife and U.S. Chamber of Commerce quarterly survey that rising interest rates are limiting their ability to access credit. That’s up from 66% last quarter and up from 60% a year ago. And that is impacting growth too, with 50% of small-business owners saying they have delayed growth plans in response to higher interest rates, while 74% say higher rates are making it harder to pay back their current loans.
That has pushed them to a mixture of other sources of financing, with 71% saying they are relying on personal savings, 67% on credit cards and 59% on local banks or credit unions (business owners were able to pick more than one source of financing in the survey).
The rapid collapse of Silicon Valley, Signature and First Republic banks earlier this year spooked both lenders and small business owners alike, said Joe Camberato, CEO and founder of online lending platform National Business Capital. Small-business owners have started to regain their confidence now — but traditional banks have not.
“What I am hearing from multiple banks is that banks are really only looking to lend to existing customers and then it really needs to make sense,” Camberato said, adding borrowers need to have substantial collateral or high-quality receivables to have a good shot at a loan.
However, non-bank lenders have become an intriguing alternative for many business owners as interest rates between their loans and traditional banks have narrowed. Now business owners who might end up with a 10% rate at a traditional bank might rather work with a non-bank lender at 12% to 15% — and, often, with faster funds.
“The smartest entrepreneurs right now are taking action and they are not focused on the talks about recession — they are focused on the opportunity. And there are great deals out there they are taking advantage of,” Camberato said.
Lending landscape a mixed bag
And other data sources back that up. Overall, loan approvals at big banks hovered at 13.4% in June, according to the Biz2Credit Small Business Lending Index. Approvals even ticked up at small banks, from 18.7% in May to 18.8% in June. Nontraditional lenders saw higher approval rates, with alternative lenders climbing from 28.9% to 29.1% in June.
There’s a mixed bag for business owners, though. Higher interest rates make for more expensive loans. But revenues at small businesses remain high, and companies attempting to staff up are finding it hard to get qualified workers, which drives up wages. Most recently, inflation showed signs of additional cooling as the consumer price index dropped to 3% year-over-year growth, down from 9.1% in June of 2022.
“Although revenues are strong, wage costs remain high. There’s only so much a restaurant can charge for a burger or a salon can charge for a haircut and expect customers to keep coming back at the same frequency,” said Rohit Arora, cEO of Biz2Credit. “Companies that are looking to hire and train staff and purchase inventory but don’t have enough cash on hand are having a hard time securing capital at a reasonable cost right now.”
Overall, despite tightening lending conditions, Bank of America Corp.’s internal data from the Bank of America Institute shows the average amount of loan disbursements deposited into small-business accounts have not slowed over the past year — in part because business owners are turning to non-bank lenders.
This comes as surveys of lending officers by BOA show traditional bank lending standards were consistent with previous recessions.
Overall, banks surveyed by the Federal Reserve Bank of Kansas City found small-business commercial and industrial lending dropped 15.9% in the first quarter of 2023 over the same period in 2022. That was driven by a 15% decrease in new term loans and a 17.2% decrease in new lines of credit.
But the post-Covid-19 lending landscape has far more non-bank alternatives than the Great Recession, when the industry was still young. It has also offered small businesses choices in access to credit when previous downturns and banking pullback used to leave them with none. Camberato said most of the deals through their platform are non-bank lenders and, if small businesses are looking to expand, there are still loans available.
“If you are concerned about a recession, then it’s even more of a reason to find as much opportunity while you can and take advantage of it and bank as many sales and profits as you can right now to be prepared for it,” Camberato said. “I’m not saying take risky, foolish bets. Now is the time you should be laser focused and working hard and taking advantage of any opportunity you can find.”
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