Loss Of Confidence And Resulting Withdrawals From Banks Lead To A Small Business Credit Crunch

Biz2Credit Small Business Lending Index finds funding requests at banks declined after Silicon Valley Bank’s collapse; borrowers find success with non-bank lenders.

Small business loan approval percentages at big banks fell from 14.2% in February to 13.8% in March, according to the latest Biz2Credit Small Business Lending Index™ . This marks is the lowest figure for big banks since July 2021. Meanwhile, small business owners also found it tougher to secure funding from small banks as approval rates of business loan applications dropped more than two percentage points from February’s figure of 21.3% to 19.1% in March.

As bank lending to small businesses declined, approvals at non-bank lenders rose in each of the categories monitored by the Biz2Credit Index.

· Alternative lenders climbed to 28.4% in March, up from 27.9% in February.

· Institutional investors rose to 26.5% of funding requests, up from 26.3% in February.

· Credit unions reversed a year-long decline in approval percentages by rising to 20.2% in March from 20.0% in February.

The collapse of Silicon Valley Bank (SVB) shook the confidence of small business owners. Many of them rushed to take their deposits out of small and midsize banks. That development hurt the banks’ ability to lend. Thus, it has become even harder for companies to secure capital. There was a sizable difference between the approval rates at banks during the first ten days before the Silicon Valley Bank (SVB) and Signature Bank collapses and the final days of March, when approvals plummeted as businesses pulled deposits from small and midsized banks.

Even though the large majority of small businesses did not lose their deposits, their faith in the banking system became shaken. Many businesses moved their money out of smaller banks when they had amounts in excess of the $250,000 FDIC insurance threshold. They put their money into big banks, which are historically stingier in their business lending than midsized and community banks.

This is bad news for business borrowers. While small business owners won’t get the level of service at big banks that they received at smaller banks, they will choose safety over service every time. Although the worst fears of small business owners may not be warranted, their confidence in the banking system has not been fully restored — and it may not return for a while. This hurts lending, and it is why small businesses are now experiencing a credit crunch.

Meanwhile, the National Federation of Independent Businesses (NFIB)’s Small Business Optimism Index decreased in March to 90.1, marking the 15th consecutive month below the 49-year average of 98. Twenty-four percent of owners reported inflation as their single most important business problem.

“Small business owners are cynical about future economic conditions,” said NFIB Chief Economist Bill Dunkelberg.

The NFIB also found that small business owners continue to invest in their companies. The study said 57% of owners surveyed reported capital outlays in the next six months. Of those making expenditures:

• 40% reported spending on new equipment,
• 23% acquired vehicles,
• 11% improved or expanded facilities,
• 11% spent money for new fixtures and furniture. and
• 6% acquired new buildings or land for expansion.

Meanwhile, 20% of owners plan capital outlays in the next few months, down one point from February, according to NFIB. Those who plan to borrow need to keep a few things on mind:

• The interest rate for small business term loans now exceeds 10% at many banks. Since business loans are quite often variable rate loans, the percentages could go even higher if the Fed continues raising rates.
• Meanwhile, SBA 7(a) loan interest rates range from 10.25% for loans above $50,000 to 12.25% for microloans of less than $25,000.
• As banks become stricter in their lending parameters, small business borrowers are more likely to get “Yes” from alternative lenders, including factors and merchant cash advance companies. However, the interest rates are much higher than what is charged by banks. (Invoice factoring or financing rangers from 10% to 79%, while merchant cash advances go from 40% to over 100%, according to a Nerdwallet study.)

With today’s higher cost of capital, it is more important than ever to do your research, look at various options, and find interest rates you can live with — especially with variable loan interest rates that could continue to climb during the rest of 2023.