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Written by Nupur Anand
NEW YORK (Reuters) – U.S. small business owners are struggling to get loans from traditional financial institutions as the effects of rising interest rates and bank failures a year ago linger, hampering business growth for some companies. I’m struggling.
Analysts and industry insiders say more traditional forms of credit are difficult to obtain because of the Federal Reserve’s rapid interest rate hikes, made worse by the failures of Silicon Valley Bank and Signature Bank last March. This shows that it is having an impact on the economy.
Small businesses are key to the nation’s economic health, with one study showing that they account for 44% of economic activity in the United States.
More than half a dozen small business owners contacted by Reuters in the past few weeks said it has become harder to obtain traditional forms of credit, such as loans from large, midsize and small-to-medium local banks.
Even if they were readily available, some were wary of relying on non-traditional financial institutions, such as fintech companies and companies that offer loans based on revenue prospects. According to industry analysts, small and medium-sized businesses typically seek loans from small and medium-sized lenders.
These small businesses were spread across the country and included restaurants, nonprofit organizations, retail boutiques, online education companies, mom-and-pop stores, and more.
“We’ve been turned down by several small and medium-sized banks,” said Gerald Williams, owner of Sacramento, Calif.-based Beer Hot Sauce. Gerald Williams had been looking for a $50,000 loan since March of last year to expand his business. Williams said his lack of funds has cost him several opportunities to grow his business, including purchasing a commercial kitchen.
A study released in January by Goldman Sachs found that approximately 77% of small business owners are concerned about their ability to access capital, and 28% of loan applicants accepted loans with payment terms they felt were predatory. Some respondents answered that they had used a credit line or a line of credit. Approximately 1,500 small-lot borrowers from across the country were among them.
“When banks tighten their underwriting standards, they typically impact low- to moderate-income customers more, resulting in a significant increase in aid from predatory lenders.” Small businesses across California said Carolina Martinez, CEO of the network CAMEO.
The Goldman study also said black-owned businesses have an even harder time accessing capital. It found that 32% of black-owned businesses that applied for loans secured loans, compared to about 47% of white small business owners. Additionally, his 86% of Black-owned businesses were concerned about access to capital.
Curbing bank lending
Over the past year, banks have reduced lending to both consumers and businesses.
The Federal Reserve’s quarterly senior loan officer poll released in January showed more banks are tightening their small business lending standards than relaxing them, although not as much as in past quarters. . Still, the net share of banks offering stricter lending terms to small businesses was more than double the historical average since 1990.
Business confidence among U.S. small businesses fell to its lowest level in January since May 2023, as weak labor costs and sales weighed on profits, according to a report released last month by the National Federation of Independent Business. Small businesses are also finding it difficult to obtain credit as inflation remains high.
Analysts say small and medium-sized regional banks have continued to struggle with deposit growth over the past year, making them cautious about lending.
“Many banks are saying if you want to get a loan with us, you have to bank with us, and that’s creating a challenge for customers,” said Timothy Coffey, an analyst at Janney Montgomery Scott. ” he said. He said rising interest rates and recent bank failures had affected loan originations.
“All of these factors are slowing down the loan origination process,” Coffey said.
The Consumer Bankers Association, which represents several lenders, declined to comment. The American Bankers Association, which represents several banks, also said multiple factors may be involved in the situation small businesses face.
“Banks of all sizes remain the largest lenders to small and medium-sized businesses, and the banking industry remains committed to meeting the credit needs of this important sector of the U.S. economy,” an ABA spokesperson said.
Rick Cusi, chief operating officer of FundKite, a small business financing platform that offers revenue-based lending, said small businesses are being forced to explore other options.
“Our business grew 20% in 2023. This came up in many conversations with companies that contacted us. They are finding it difficult to get loans from banks because they are not a good fit or for other reasons,” Khushi said.
hinder growth
The credit crunch is constraining the growth of some small and medium-sized enterprises.
Chantel Chambliss, a business owner based in Richmond, Virginia, said she had been looking for a $25,000 loan since May, but was turned down by multiple lenders and was forced to scale back her ambitions.
“We had planned to achieve this six months ago, but due to financial constraints, we have not even started yet,” she said.
She was able to borrow about $6,000 from a non-bank lender that provided funding based on potential earnings, but she says she doesn’t want more because the terms are unsuitable.
“The process of looking for a loan was so frustrating that I decided to give up,” Chambliss said.
(Reporting by Nupur Anand in New York; Editing by Megan Davies and Deepa Babington)
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