Credit Spigots Continue to Tighten for Small Businesses

The traditional spigots of credit continue to tighten for small businesses.

Blame higher rates, the continued fallout of the Silicon Valley Bank collapse last year, and skittishness on the part of lenders.

The impact will hinder the ability of small businesses to capitalize on growth opportunities or simply keep afloat.

Reuters took note of the pressures, with anecdotal reports of small business owners having been turned down by small- to medium-sized banks. A Goldman Sachs survey noted that more than three-quarters of business owners have been concerned about their ability to access capital.

PYMNTS Intelligence found that less than half of firms with up to $10 million in annual revenues reported having access to business or personal financing. About a quarter of firms said they would look to increase their use of credit products in 2024, with more than half of them eyeing business credit cards. Roughly a quarter of companies said they would seek loans from online lenders, slightly more than the 21% that had been leaning toward applying for working capital loans from a bank. Only 15% would opt for unsecured bank loans.

The fact that online lenders are gleaning slightly more interest from small firms as a channel to tap beyond traditional lenders signals that these businesses are cognizant of the reticence on the part of banks to extend financing.

The Fed’s Stats

This week, the Federal Reserve released its latest Beige Book survey.

“Banking contacts also indicated that credit standards tightened, particularly for business loans and commercial mortgages,” the survey said. “While deposit rates held steady, loan spreads narrowed, and delinquencies continued to rise.”

“Banks and business clients agreed that higher interest rates had lowered demand for loans, while tighter access to credit had lowered the potential supply,” the survey also said.

The Federal Reserve Bank of Kansas City noted at the end of last year that new lending continued to decline in the third quarter, decreasing 18.1% from the same period in 2022 and 16.4% from the previous quarter. With a bit more granular insight, the declines were driven by a 21.1% decrease in new term loans and a 13.2% decrease in new lines of credit. The banks surveyed by the Fed detailed that 21% of lenders reported a decrease in applicant credit quality.

“This is the sixth consecutive period in which respondents of all bank sizes, on net, reported a decrease,” the Fed wrote. “Of the respondents reporting a change in credit quality, whether an increase or decrease, 50% cited the debt-to-income level of business owners as a very important reason for a change. Other commonly cited reasons for a change include the liquidity position of business owners, recent business growth income and credit scores.”

In other words, the business owners themselves are showing some pressures on their own operating results, which in turn impacts loan approvals. It’s a tough cycle that comes at what is arguably a tough time for small business owners.