Loss of confidence and ensuing bank withdrawals lead to a credit crunch for small businesses

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Biz2Credit Small Business Lending Index Finds Bank Loan Demands Decline After Silicon Valley Bank Collapse; borrowers find success with non-bank lenders.

Small business loan approval percentages up big banks fell from 14.2% in February to 13.8% in March, according to the latest Biz2Credit Small Business Lending Index™ . This is the lowest figure for major banks since July 2021. Meanwhile, small business owners also found it more difficult to access financing for small banks as business loan application approval rates fell by 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 among non-bank lenders rose in each of the categories monitored by the Biz2Credit Index.

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

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

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

The collapse of the Silicon Valley Bank (SVB) shook small business confidence. Many of them rushed to collect their deposits from small and medium-sized banks. This development damaged the banks’ ability to provide loans. For example, it has become even more difficult for companies to secure capital. There was a significant difference between bank approval rates 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 companies pulled deposits from small and medium-sized banks.

While the vast majority of small businesses did not lose their deposits, their confidence in the banking system began to waver. Many companies moved their money from smaller banks when they had amounts exceeding the $250,000 FDIC insurance threshold. They put their money in large banks, which have historically been stingier in their corporate lending than medium-sized and community banks.

This is bad news for business borrowers. While small business owners won’t get the level of service they got from smaller banks at big banks, they will choose safety over service every time. While small business owners’ worst fears may not be justified, their confidence in the banking system has not fully recovered – and may not return for some time. This hurts lending, which is why small businesses are now experiencing a credit crunch.

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

“Small business owners are cynical about future economic conditions,” said Bill Dunkelberg, chief economist for the NFIB.

The NFIB also found that small business owners continue to invest in their businesses. The research shows that 57% of owners surveyed report capital expenditures in the next six months. Of those who spend:

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

Meanwhile, 20% of owners plan capital expenditures in the coming months, down one point from February, according to NFIB. Those planning to borrow should take a few things into account:

  • The interest rate for small business loans is now above 10% at many banks. Since business loans are often floating-rate loans, the rates could go even higher if the Fed continues to raise interest rates.
  • In the meantime, SBA 7(a) Loan Interest Rates range from 10.25% for loans over $50,000 to 12.25% for microloans under $25,000.
  • As banks become stricter on their lending parameters, small business borrowers are more likely to get “yes” from alternative lenders, including factors and advance companies. However, the interest rates are much higher than what banks charge. (Invoice factoring or financing ranges from 10% to 79%, while cash advances from sellers range from 40% to over 100%, according to a Nerdwallet study.)

With today’s higher cost of capital, it’s more important than ever to do your research, look at different options, and find interest rates you can live with, especially with variable interest rates on loans that could continue to rise through the rest of 2023.