Survey: Small businesses in need of a loan find banks stingy
NEW YORK — Small businesses still have the pandemic and now high inflation to grapple with — and they’re finding it’s tough to get a loan to help with the daily grind.
A recently released survey from the Federal Reserve shows how the pandemic has altered the financial landscape for small business. About 85 percent experienced financial difficulties in 2021, up nearly 20 percentage points from 2019.
Back then, more than half of owners who sought a loan were looking to expand; last year, the majority of applicants needed funds just to cover every day operating expenses.
Meanwhile, inflation is the highest in decades, with raw materials and finished goods soaring in price and workers demanding higher wages. The Federal Reserve is raising interest rates in response, which means the cost of borrowing money is going up.
During the pandemic, banks have been stingier, outside of Covid-related programs. Two years in, loan applicants are more likely to get turned down or to receive less money than they asked for compared to before COVID-19.
When the building she leased in went up for sale, Letha Pugh knew she would need to relocate 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 worried that another buyer would swoop in with cash and buy the building she was under contract for. Finally, in January, she got approval for a loan of $780,000.
Only about 30 percent of businesses that applied for financing last year got the full amount that they asked for, down from about half in 2019. Firms owned by people of color, firms with fewer employees, and leisure and hospitality firms were least likely to receive the full amount of financing sought. About 68 percent of applicants got some of the amount they applied for, down from 83 percent in 2019 and 76 percent in 2020.
The banks’ stinginess has led business owners to consider other options such as community banks, online lenders and crowdfunding sites. Owners were more likely to apply for an online loan 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 can be easier to get but are likely come with higher interest rates or steep penalties. Typically, traditional banks’ small business loans carry interest rates from 3 percent to 7 percent, while online loan rates vary widely but can be 10 percent and higher.
Business at Cache, a Sandy, Utah-based company that sells truck accessories, boomed during the pandemic. But that unexpected success left the company in a financial bind.
Co-founder Tyler Green realized that the company needed to ramp up manufacturing. Meanwhile, shipping costs jumped from $2,500 per shipping container to $26,000.
Green and his business partner went to their bank seeking a loan of $50,000 to $100,000 but were told they didn’t qualify for a loan that big. Another problem: As a new business that was making money, Cache didn’t qualify for pandemic aid either.
So, the owners turned to Quickbooks’ lending arm, QB Capital.
They got a loan in three days. It’s $15,000 with an interest rate of 10 percent.
That doesn’t cover everything, but is essential for keeping the business going in the short-term.
For Suzan Hernandez, finding support from community organizations has been key to helping her navigate the loan process.
Hernandez founded Mamap, which sells personal care products that cut down on plastic like bamboo toothbrushes and laundry detergent sheets, in 2019. She found a mentor via the JP Morgan Chase Minority Business Program, and the mentor advised her to join groups like the New Jersey Hispanic Chamber of Commerce and the New Jersey Small Business Development Corp. for support.
She’s looking for a $500,000 loan or line of credit. She has been applying to different loans from community lenders and Sba-backed banks for about eight weeks. Although it’s time-consuming, she said the process is worth it because of the low rates offered — interest rates vary from 3 to 6 percent.
Suzan Hernandez, founder of Mamap, poses for a picture on March 22 in Jersey City, N.J. Many small businesses are seeking new financing, with mixed results.