Small businesses are confronting bank lending hurdles
by Wells Fargo found demand for credit is little changed from earlier this year. Holding back if they need financing can mean owners put off hiring or upgrading equipment that could increase productivity, which can ripple through the economy.
Many owners have been shunning debt since the recession taught hard lessons about borrowing. If their companies weren’t hamstrung by big loan balances during the downturn, owners saw plenty of other businesses falter when revenue fell and monthly payments became unmanageable. And the banking system’s woes led to increased regulations under the law known as Dodd-Frank. Bankers and companies say the lending process is much harder because of the added rules — a likely contributor to the problems Ward has been having.
The Dodd-Frank rules also mean community banks — a primary source of smallbusiness loans — have had to spend more to comply with the new regulations. That cuts into their profits and has contributed to a wave of community banks merging into regional or national banks.
Many owners seek financing elsewhere. Credit cards, personal loans and borrowing from family or friends were among the most popular alternatives, according to a first-quarter survey by Pepperdine University’s Graziadio School of Business and Management and Dun & Bradstreet.
Whether the issue is with an owner or a banker, it’s not just would-be borrowers that are affected — so are companies they do business with. Some customers of Carl Mazzanti’s computer networking and security company want to upgrade their systems, but it’s been taking longer than expected the past few months to get banks to agree to finance the deals, says Mazzanti, owner of eMazzanti in Hoboken, N.J.
“We have about 20 percent of annual sales currently sitting out in some version of financing that hasn’t closed,” he says. So he’s basing his decisions now on the expectation that deals will take longer.
The Federal Reserve’s two interest rate increases since September are another factor.
Rising rates are discouraging Sam Carter from expanding his online company, Challenge Coins 4 U, which produces custom-made medallions and lapel pins. Carter used his own funds to start the Cheyenne, Wyo.-based company six years ago and reinvested profits as it grew. When he wanted a loan to help the company grow faster, he found banks willing to lend to him — at annual rates of 20 percent or more. He can’t afford that.
Rising interest rates generally mean the Fed thinks the economy is doing well enough to withstand them. If U.S. economic growth picks up momentum, owners may be more inclined to borrow, says Bodhi Ganguli, an economist with Dun & Bradstreet. And although interest rate hikes make borrowing more expensive, they might also make banks more interested in lending to small companies.
“It’s easier for them to make a decision if they have a higher chance of making a profit,” Ganguli says.
Owners may also feel better about borrowing when they see what the Trump administration and Congress can accomplish in terms of taxes and regulations, says Raymond Keating, chief economist with the advocacy group Small Business & Entrepreneurship Council.
“They still have to see the policy changes they’re expecting to happen,” he says.