Small Businesses Feeling Credit Crunch

Nat West, the owner of Reverend Nat's Hard Cider, a cider-making company, believed that securing financing for a taproom in a bustling neighborhood in Portland, Oregon would be easy. He aimed to obtain $50,000, had been in business for 11 years, and generated over $1 million in yearly revenue through his wholesale business. However, despite reaching out to three lenders he had previously received financing from, including one where he had an existing line of credit, West was surprised to be rejected.

The tightening of credit for small businesses due to rising interest rates has already limited borrowing opportunities. Following the recent collapses of Silicon Valley Bank and Signature Bank, small and midsize banks that serve small businesses may be forced to further reduce credit due to an outflow of deposits and the need to retain capital. Additionally, banks are generally becoming more cautious due to economic uncertainty. West's case is not unique, and many small businesses are struggling to obtain the funding they need.

Ray Keating, the chief economist for the Small Business & Entrepreneurship Council, expressed concern that small businesses will be hit the hardest by the current credit crunch. Approval rates for small business loans at big banks have been declining for nine consecutive months, with larger banks approving just 14.2% of applications in February 2021, down from 28.3% in February 2020. Small banks granted approximately 20% of loan applications this February, but this is a significant decrease from the 50% approval rate they had in early 2020.

According to Rohit Arora, the CEO and co-founder of Biz2Credit, an overall tightening of credit will help slow down the economy and ease inflation, but it will negatively impact small businesses, which are significant job creators and sources of innovation for the economy. As a result, small businesses will be left in the lurch. Basic Fun, a maker of toys such as Care Bears and Lincoln Logs, had to temporarily suspend its acquisition plans due to the credit crunch. CEO Jay Foreman cited the banking turmoil following the collapse of Silicon Valley Bank as the reason for lenders appearing unclear about broader credit markets and clutching their purse strings tightly.

Similarly, companies with existing lines of credit are seeing interest rates increase, which is forcing them to delay purchases of necessary equipment or put expansion plans on hold. Small businesses are more vulnerable to the credit crunch than larger businesses because they have fewer levers to pull to secure funding. Dawn Barber, the founder and managing director of Web Shop Direct, has delayed some of her expansion plans due to stricter credit terms. Although her business generates an annual revenue of 2.5 million pounds, when she turned to PayPal for extra funding, she discovered that the financial terms were stricter than a year ago. Barber wanted to borrow 150,000 pounds, but she was charged 10,000 pounds upfront instead of the usual 6,000 pounds, and she was given a shorter repayment period of six months instead of nine months. She deemed the terms too steep and put a hold on the official launch of a new line of wellness products that was expected to account for 20% of her annual sales.

Nat West, the owner of Reverend Nat's Hard Cider, put $10,000 on his personal credit card to finance his new taproom, as he was unable to secure financing from the three lenders he reached out to. Despite the challenges, he is thankful he was able to put it together, as many others will have to put their dreams on hold.