Small businesses that need credit find banks to be stingy | Latest Headlines
MAE ANDERSON Associated Press
NEW YORK — Small businesses are still grappling with the pandemic and now high inflation — and they’re finding it difficult to get credit to get by on a day-to-day basis.
A recent Federal Reserve survey shows how the pandemic has transformed the financial landscape for small businesses. About 85% experienced financial difficulties in 2021, up nearly 20 percentage points from 2019. Back then, more than half of homeowners who applied for a loan wanted to expand; Last year, the majority of applicants needed funds to cover day-to-day running costs.
Meanwhile, inflation is at its highest in decades as prices for raw materials and manufactured goods soar and workers demand higher wages. In response, the Federal Reserve is raising interest rates, which means the cost of borrowing is rising.
Even in normal times, small businesses can find it difficult to obtain credit from traditional banks as they lack the assets and credit histories of larger companies. During the pandemic, banks have been stingier outside of COVID-related programs. Two years later, loan applicants are more likely to be rejected or receive less money than they applied for, compared to before COVID-19.
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When the building she rented went up for sale, Letha Pugh knew she had to move her business. So she decided to buy and renovate her own building.
Pugh, co-founder of Bake Me Happy, a gluten-free bakery in Columbus, Ohio, applied for a Small Business Administration loan last July. But the process, involving a community development financial institution and a local bank, First Merchants Bank, dragged on.
Pugh feared that another buyer would rush in with cash and buy the building she was under contract for. Finally, in January, she received approval for a $780,000 loan.
While Pugh is happy it all worked out, the episode shows just how difficult and stressful it can be for a small business to get financing.
“One night I put the phone down and just started crying because I was so frustrated that all these things were happening, not because of me, but because of the bureaucracy and bureaucracy,” she said.
Only about 30% of businesses that requested funding over the past year received the full amount they asked for, up from about half in 2019. Businesses owned by people of color, businesses with fewer employees, and businesses in the leisure and entertainment industries Hospitality businesses were the least likely to receive the full amount of funding requested. About 68% of applicants received part of the amount requested, up from 83% in 2019 and 76% in 2020.
Todd McCracken, president of the National Small Business Association, an advocacy group, said the current credit environment could make it harder for small businesses to recover from the pandemic. Their balance sheets, which banks use to assess loan applications, have been weakened during the pandemic, although their prospects are good.
“Past performance isn’t a really good indicator of future potential,” he said.
In February, major banks approved 14.7% of loan applications, up from 28.3% in February 2020. And small banks approved 20.5% of loan applications, up from 50.3% in the same month in 2020, according to data from the online Lender Biz2Credit highlighted data from more than 1,000 small business owners who applied for funding on the company’s platform.
Bank stinginess has prompted business owners to consider other options such as community banks, online lenders, and crowdfunding sites. Owners applied for online loans more frequently last year than in 2020, while applicants were less likely to seek financing from a small bank, the Fed survey shows.
There are tradeoffs, however: Alternative loans may be easier to get, but are likely to come with higher interest rates or hefty penalties. Typically, traditional banks’ small business loans have interest rates between 3% and 7%, while online loan rates vary widely but can be as high as 10% or more.
“The good news is that small businesses have a lot of options out there, although they may not be the cheapest options,” said Matt Schulz, chief credit analyst at online lending marketplace LendingTree.
Business at Cache, a Sandy, Utah-based company that sells truck accessories, has boomed during the pandemic. But this unexpected success brought the company into financial difficulties.
Co-founder Tyler Green realized the company needed to increase production. Meanwhile, shipping costs have increased from $2,500 per shipping container to $26,000.
Green and his business partner went to their bank for a loan of between $50,000 and $100,000, but were told they would not qualify for a loan that large. Another problem: As a new company making money, Cache wasn’t eligible for pandemic relief either. And as a manufacturer, the company urgently needed money.
So the owners turned to QB Capital, Quickbooks’ lending arm. They got a loan in three days. It’s $15,000 with an interest rate of 10%. That doesn’t cover everything, but it’s essential to keep the business going in the short term.
“It’s really something that’s really saved our business,” Green said.
Crowdsourced loans are another option for small businesses.
Since starting Hugo Coffee Roasters in Park City, Utah in 2015, Claudia McMullin hasn’t been able to convince a traditional bank to lend her. She said she lacks the historical cash flow that banks like to see.
“Small businesses get stuck in this twilight zone between we need capital to grow, but we can’t get capital to grow because we don’t qualify, because we haven’t grown yet,” McMullin said.
She has used her own money and borrowed from friends and family to fund the business. Then last year she got a big order from a grocery chain for beans that she didn’t have enough money to pay for.
McMullin took out a loan from an online lender she called “a lifesaver at the time.” But the terms were strict with payments due weekly, and she had trouble paying them back.
“It only works if you get in and out quickly,” she says. “Now it feels like it’s killing me and destroying my cash flow.”
She turned to Kiva, which offers crowdsourced loans at low interest rates, to help restructure her debt. McMullin’s $25,000 loan has 0% interest and an 18-month repayment period. Kiva says it will work with borrowers who can’t repay a loan in the time allotted, even though they aren’t eligible for additional credit because of a default.
Online lenders are not the only option for traditional banks. For Suzan Hernandez, finding support from community organizations was key to help her navigate the loan process.
Hernandez founded MamaP in 2019, which sells personal care products that reduce plastic like bamboo toothbrushes and laundry detergent sheets. She found a mentor through the JP Morgan Chase Minority Business Program, and the mentor advised her to join groups like the New Jersey Hispanic Chamber of Commerce and New Jersey Small Business Development Corp. for support.
She is looking for a $500,000 loan or line of credit. She has been applying for various loans from municipal lenders and SBA-backed banks for about eight weeks. Though it’s time-consuming, she said the process is worth it because of the low interest rates on offer – rates vary between 3% and 6%.
“Right now it’s a lot of paperwork working with reps to understand what we qualify for and what’s required,” she said, but it’s worth it. “It was good. As it is not a direct loan from a traditional bank, they have been more supportive.”