NEW YORK (AP)
Of the many challenges small businesses face these days as they seek to grow, obtaining financing is near the top.
Both large and small banks are tightening their lending standards. The Federal Reserve raised interest rates Over the past two years, the collapse of three regional banks this spring and More stringent regulations possible Some banks are also likely to have become more cautious.
So business owners are having to make sacrifices, turning to crowdsourcing rather than lenders, borrowing from family and friends, or simply giving up on expansion plans that could have been funded by more capital.
According to the Federal Reserve, which surveys senior bank loan officers quarterly, 49% of banks said they tightened lending standards for small businesses with less than $50 million in annual sales in the July-September quarter, up from 22% in the same period a year ago. Loan officers cited an increasingly uncertain economic outlook as one reason for the tightening.
Biz2Credit data paints a similar picture: In June 2022, large banks approved 15.4% of small business loan applications. That figure has fallen every month since, to 13% in October. Smaller banks approved roughly one in five loan applications, a far cry from the 50% approval rate they saw before the pandemic.
Meanwhile, interest rates are soaring: The average interest rate on a short-term loan was 9.1% in October, up from 6.7% a year earlier and 4.9% the year before that, according to the National Federation of Independent Business.
All these factors combine to create a challenging environment for small businesses seeking financing.
Cheyenne Smith of Salt Lake City, Utah, founded Dakota Ridge, a company that makes cowboy rain boots for children, in 2021 with about $80,000 in capital, including savings from her previous job and borrowing from her 401(k) retirement plan.
Smith soon realized he needed more money to build up his inventory than he initially thought, but because he didn't have two years of tax returns, he didn't qualify for many small-business loans. Online lenders quickly offered to help, but the terms were too restrictive, requiring weekly payments and interest rates of up to 40%. Online lenders approve more loans than traditional banks, but interest rates are often higher.
“It's been a nightmare trying to get financing,” she said. With no other options, she borrowed about $30,000 from her mother at the end of 2022.
“A lot of people don't have that opportunity,” she says. “I realize I'm very fortunate and privileged to have that opportunity, not only because I have the cash up front from my 401(k), but because I have family who are willing to invest for me.”
Rising interest rates have proven nearly insurmountable for Chantelle Chambliss, owner of NonProfitability, a Richmond, Virginia, consulting firm that helps nonprofit and faith-based organizations grow their businesses.
She launched her business in 2017 and grew it without any outside funding. In May of this year, Chambliss made plans to expand, which would require her to hire more staff and invest in technology. She realized she needed a loan to move forward with her plans.
Her goal was to get a loan of $25,000. Her bank, Capital One, denied her the loan but increased her credit card credit limit to $3,000. “It's just not enough,” she said. Her private bank similarly denied her the loan.
Chambliss tried nontraditional methods and was approved for a larger loan of $11,500 from an online lender, but she said the interest rates were so high that it didn't make sense to accept it. The lowest rate she was offered was 27%.
“For small businesses, it's not only intimidating, it's nearly impossible,” she said.
For now, she's put her expansion plans on hold: She plans to launch a crowdfunding effort in January, calling it “the only logical next step.”
“We're going to keep working, but right now we really feel like hamsters in a wheel,” she said, “and we don't feel like anyone is going to come and help us.”
Environmental concerns have caused some smaller businesses to postpone projects. Nate Hodge co-founded Larkha Chocolate in 2010 with money from long-term investors and has relied on them for working capital ever since.
But after the pandemic hit, Hodge and his partners started raising money for the renovation from banks and online lenders rather than investors, and he was shocked by the lending environment: Online lenders were offering interest rates of 19% or more.
He instead turned to investors for private loans, but the loan still wasn't enough to cover his plans to renovate the warehouse space, which included putting down floors and removing some walls.
“I had to postpone because I couldn't find a good lender,” he said. “It's really frustrating. I feel like it's almost predatory the way some (online) lenders are offering loans to small businesses.”
Jen Rose started a business called Bee Cups in her garage in Dallas, Texas, during the pandemic selling small garden devices that collect water and feed pollinators.
She found financing, but it was a struggle, and she saw the impact of rising interest rates firsthand: She sought a $350,000 loan to buy a storage unit after outgrowing her garage, but was turned down by two banks, even though she had enough money for a down payment.
She explored offers from other banks and found success with Comerica Bank, closing on a deal at the end of 2021 with an enviable 3.8% interest rate.
In August, she paid off a second loan of about $400,000 on an adjacent property from Comerica Bank, but this time the loan interest rate was lowered and the interest rate nearly doubled to 7 percent.
Still, Rose said she doesn't feel she has much choice but to take out a loan, especially with interest rates lower than average.
“If I could have waited a little longer, I would have,” she says, “but the space opened up and I felt like if it was going to happen, I had to grab it.”
