Small businesses borrowing at slower rate
Uncertainty over Trump’s agenda gets some of the blame
Small businesses are still basking in the afterglow of President Trump’s upset victory in the 2016 election, and they’re bullish about his proposed tax cuts and health care changes, surveys show.
So why aren’t they borrowing money?
Various indicators show U.S. companies, particularly small firms, have been taking out fewer loans in recent months, a sign they’re spending less on new equipment and structures. And that can crimp economic growth and hiring.
Experts cite a variety of reasons, including uncertainty over Trump’s agenda getting through Congress amid probes into his ties with Russia.
“Businesses are just wanting clarity before putting these investments to work,” said Stephen Caprio, U.S. credit strategist for UBS.
Rishi Khanna, CEO of ISHIR, a Dallas-based software consulting firm, said several projects have been delayed, in part because of Trump’s plan to reduce the number of H-1B visas, which affects technology workers he assigns to clients. Some clients, he said, are also holding back because of uncertainty over Trump’s agenda.
As a result, Khanna has de-
ferred plans to borrow several hundred thousand dollars for new computer hardware and software amid a 10% to 15% drop in revenue from a year ago.
“Customers are taking baby steps,” he said. “It is a bit frustrating.”
Experts point to other culprits for the lending slump: a flurry of Federal Reserve interest rate hikes that boost borrowing costs for some, and a retreat after some small firms took out too many expensive loans.
Some economists downplay the drop in lending, attributing it to an earlier decline in investment, especially among energy companies. But Caprio said energy firms represented just a small slice of the market.
In the first quarter, loans to non-financial U.S. businesses rose about 3% from a year earlier, compared with 10% annual growth in the first half of 2016, UBS figures show. Small businesses appear to be more cautious. Bond issuance — effectively a loan funded by financial markets — by larger companies increased 2% in the January-March period from the fourth quarter while loans by small firms edged up just 0.3%, according to UBS.
The trend hasn’t reversed recently. Twenty-eight percent of small businesses said they had borrowed at least once every three months in May, down from 31% the prior month and the lowest since October, according to the latest survey by the National Federation of Independent Business. The portion planning to make a capital expenditure in the months ahead edged up to 28%, still below pre-recession levels.
While small business optimism is still near record levels, many are “trying to see how (Trump’s plan) plays out” before borrow- ing, said Holly Wade, NFIB research director.
Loan applications to Biz2Credit, which connects thousands of small business borrowers to lenders online, fell 0.5% in May following a 2.5% decline in April, said Biz2Credit CEO Rohit Arora. That marked the first time in two years loan applications dropped two consecutive months, he said.
“Businesses were expecting health care reform and tax reform to come in,” he added. “Expectations ran ahead of reality.”
Arora and Caprio also partly blamed three Fed rate hikes since December. Arora said the increases quickly translate into higher borrowing costs for small businesses with lines of credit or Small Business Administrationbacked loans. Thirty-one percent of companies surveyed by UBS said they would slow capital spending if rates increased by less than 1%.
Many small concerns have turned to alternative online lenders that have easier credit standards but charge higher interest rates and require payback in six months to a year, said Ami Kassar, CEO of MultiFunding, a loan adviser for small businesses. Some struggle to keep up with the payments and take out additional loans, digging a deeper hole for themselves. In recent months, several have stopped borrowing because they went bankrupt, he said.
Others are simply responding to softer demand.
Raja Jhanjee, owner of Bukhara Grill in Manhattan, said business is down 15% to 20% from a year ago. He points to fewer international visitors as a result of fears sparked by Trump’s immigration crackdown. And so he’s holding off on seeking a loan to open a new restaurant.
“You have to wait and watch,” he said.