Small-Business Loan Standards Tightened.

"Banks are tightening lending standards. Small businesses are paying the price.

Some entrepreneurs are finding it more difficult to get a new loan or have had existing credit lines cut. Others report stricter terms, higher borrowing costs, longer waits and tougher questions from their bankers.

"They are definitely being more conservative," said Brock Hutchinson, chief executive officer of Big Frig, a maker of coolers and drinkware in North Sioux City, S.D. "Things have tightened up."

Big Frig's sales slowed in the fourth quarter as corporate customers cut spending on promotional products. In response, the company's bank reduced the credit line for the 26-person company to $450,000 from $1 million early this year, Hutchinson said. The bank has raised its interest rate on a commercial-real-estate loan by more than 3 percentage points from a year ago and increased the required down payment, said Hutchinson, prompting the company to delay plans for a new $3 million building.

Nearly half of banks reported stricter loan standards for small businesses in the past three months, according to a survey of senior loan officers released by the Federal Reserve Board in May. More than half said they expect to tighten small-business lending standards further in 2023.

Many small businesses are reluctant to borrow, particularly at today's high rates. The median interest rate for a variable-rate, small-business term loan was 7.44% in the fourth quarter, the last period for which data are available, up 3.42 percentage points from a year earlier, according to the Federal Reserve Bank of Kansas City. Banks have continued to raise rates this year in response to Fed rate increases, said Ami Kassar, CEO of business-loan adviser MultiFunding.

"Before, if we needed to buy a truck, we would go and finance it," said Guiomar Obregon, CEO of Precision 2000, a construction company in Atlanta with nearly 80 employees. "Now, I think, 'Do we need it now? Can we wait?'"

Seventy-seven percent of small businesses said in April they were concerned about their ability to access capital, according to a survey of 1,740 small businesses by Goldman Sachs, up from 23% a year earlier.

Tamara Keefe, owner of Clementine's Naughty & Nice Creamery in St. Louis, said she moved forward with plans to open two new locations based on her bank's assurances it would provide two loans and a line of credit, backed by the Small Business Administration. But the bank moved slowly, said Keefe, and she drained cash reserves to cover the costs of the build-out, equipment and inventory.

The bank gave the business a $150,000 emergency line of credit then told her she had to repay the credit line to close on the new SBA loans. The 158-person company makes specialty ice creams in flavors such as Gooey Butter Cake and Maple Bourbon.

Keefe said when she received a term sheet in May, the premium over the prime rate was larger than expected. The bank also boosted cash-flow requirements. The new loans, totaling $1.1 million, carry a variable rate, currently 11.5%, well above the 6% fixed-rate loan she sought last year. "I am down to the wire," said Keefe. "The loan is not closed," she said. "I'm devastated."

Banks began tightening lending standards last year, amid worries about a slowing economy. The collapse of Silicon Valley Bank heightened concerns about liquidity.

Small businesses tend to borrow from small banks and are less likely to secure loans from the banking giants. "The alternative to borrowing from your local small bank is another form of financing that is going to be notably more expensive," said Goldman Sachs chief U.S. economist David Mericle.

The appetite for lending varies by bank. Tightening has been most pronounced at midsize banks, according to Federal Reserve data. Banks have long favored customers with deposits and other relationships, but those factors have taken on even greater weight." [1]

1. Small-Business Loan Standards Tightened. Simon, Ruth. 
Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 02 June 2023: B.1.