Small businesses in the US are facing a tough time securing loans from big banks as the credit crunch worsens. According to the latest Biz2Credit Small Business Lending Index, loan approval percentages at big banks ($10 billion+ in assets) fell from 13.3% in July to 13.2% in August, a nearly two percent drop from August 2022, when approvals were at 15.1%. This is the 15th consecutive month of decline in big bank lending to small businesses.
Why are big banks tightening lending standards?
One of the reasons why big banks are tightening lending standards is the proposal of banking regulators that lenders keep a higher percentage of their assets in reserve. This is meant to ensure that banks have enough capital to withstand potential losses and shocks in the financial system. However, this also means that banks have less money available to lend to small businesses and consumers.
Jamie Dimon, CEO of JPMorgan Chase, the nation’s largest bank, sharply criticized the idea at an industry conference in New York and warned that stricter capital requirements could lead to a slowdown in lending. He called the proposals “hugely disappointing” and said they would hurt economic growth and job creation.
Another reason why big banks are reluctant to lend to small businesses is the uncertainty and volatility in the economic environment. The US economy has been resilient in the first half of the year, defying the expectations of economists who predicted a recession. However, many expect the second half of the year to bring some challenges as the Federal Reserve continues to raise interest rates to combat inflation. Higher interest rates make borrowing more expensive and reduce the demand for loans.
Additionally, big banks are facing increased competition from non-bank lenders, such as online platforms, fintech companies, and alternative lenders, who offer faster and easier access to credit for small businesses. These lenders have more flexible and innovative underwriting criteria and use technology to streamline the application and approval process. According to the Biz2Credit Small Business Lending Index, loan approval percentages at non-bank lenders rose from 24.8% in July to 25% in August.
How are small businesses coping with the credit crunch?
Small businesses are coping with the credit crunch by seeking other sources of funding or reducing their borrowing needs. Some of the options that small businesses are exploring include:
- Applying for loans from regional and community banks, which have higher approval rates than big banks. According to the Biz2Credit Small Business Lending Index, loan approval percentages at small banks rose from 18.6% in July to 18.7% in August.
- Applying for loans from credit unions, which have lower interest rates and fees than banks. However, credit unions also have stricter lending standards and lower loan amounts than banks. According to the Biz2Credit Small Business Lending Index, loan approval percentages at credit unions fell from 20.4% in July to 20.3% in August, an all-time low.
- Applying for loans from government programs, such as the Small Business Administration (SBA), which guarantee a portion of the loans made by participating lenders. The SBA offers various loan programs for different purposes, such as working capital, equipment purchase, real estate acquisition, disaster relief, and export financing. However, SBA loans also have complex eligibility requirements and lengthy application processes.
- Applying for loans from online platforms, such as Biz2Credit, which connect small businesses with multiple lenders who offer different types of loans, such as term loans, lines of credit, invoice financing, merchant cash advances, and equipment financing. Online platforms use technology to match borrowers with suitable lenders based on their credit profile and business needs. Online platforms also provide faster and simpler application and approval processes than traditional lenders.
- Seeking funding from alternative sources, such as crowdfunding, angel investors, venture capitalists, family and friends, personal savings, or credit cards. These sources may offer more flexibility and convenience than bank loans, but they may also involve higher risks, costs, or obligations.
What are the implications of the credit crunch for small businesses?
The credit crunch has significant implications for small businesses, as they rely heavily on external financing to start, operate, and grow their businesses. According to a survey by the Federal Reserve Bank of New York, 73% of small businesses applied for external financing in 2022.
The lack of access to affordable and adequate credit can limit the ability of small businesses to:
- Invest in new equipment, technology, inventory, or facilities
- Hire new employees or retain existing ones
- Expand into new markets or products
- Innovate or improve their products or services
- Survive unexpected expenses or emergencies
- Compete with larger or better-funded rivals
The credit crunch can also affect the overall health and performance of small businesses, as they may face:
- Lower revenues or profits
- Higher costs or debts
- Reduced cash flow or liquidity
- Increased stress or uncertainty
- Lower customer satisfaction or loyalty
- Reduced growth or survival prospects
The credit crunch can also have negative consequences for the broader economy, as small businesses play a vital role in:
- Creating jobs and income
- Generating tax revenues and social benefits
- Driving innovation and productivity
- Supporting local communities and causes
- Enhancing diversity and inclusion
Therefore, it is important for policymakers, regulators, lenders, and small businesses to work together to address the challenges and opportunities of the credit crunch and ensure that small businesses have access to the financing they need to thrive and contribute to the economic recovery.
