Small Businesses Struggle as Banks Tighten Lending

Smaller businesses have begun cutting back as banks impose tougher lending standards.

As The Wall Street Journal (WSJ) notes in a Thursday (June 1) report on the phenomenon, merchants are having trouble getting new loans, seeing credit lines cut, or are facing higher borrowing costs, longer waits and greater scrutiny from lenders.

“They are definitely being more conservative,” Brock Hutchinson, chief executive officer of Big Frig, a South Dakota maker of coolers and drinkware, told the WSJ. “Things have tightened up.”

The report cites a Federal Reserve Board survey of senior loan officers that found nearly half of banks saying they’d tightened loan standards for small businesses in the past three months, with more than 50% saying they expect to tighten them even further as the year goes on.

The situation has left many small businesses hesitant to borrow, as interest rates for small-business term loans have gone up 3.42 percentage points in the past year.

“Before, if we needed to buy a truck, we would go and finance it,” said Guiomar Obregon, CEO of Atlanta construction firm Precision 2000. “Now, I think, ‘Do we need it now? Can we wait?’”

PYMNTS has been following this trend in recent months, as our latest quarterly study of Main Street small and medium-sized business (SMB) health found many businesses in a cash crunch. Just a quarter of firms surveyed report having access to more than 60 days of cash. As many as 17% of firms said they have no cash cushion.

The situation differs from industry to industry. Fully 50% of construction companies said they have access to less than 30 days’ worth of cash, while 45% of firms in the hospitality sector said the same.

“These businesses depend on large-ticket spending from end consumers, and are seasonal — and are certainly brick-and-mortar, which means that operating costs are high too,” PYMNTS wrote. “As to where they’re getting the funds? PYMNTS data reveal that roughly a third of them are tapping into personal credit cards — only about 17% are getting funding from banks.”

Meanwhile, smaller businesses that operate through online channels have found digital avenues and platforms geared toward eCommerce (and omnichannel commerce) that help them tap into less traditional means of financing.

For example, Amazon’s recent small business update showed that the eCommerce giant and its third-party lending partners loaned $2.1 billion to independent sellers last year, a 50% increase from 2021. And during earnings season, Shopify said it had lent out $477 million in merchant advances and loans in the first quarter of 2023.