As we move through 2023, we are noticing a troubling trend affecting small businesses in general and even some of our clients: acquiring loans is becoming increasingly difficult. A perfect storm of rising interest rates, stricter lending standards, and new financial disclosure regulations are creating significant hurdles. We believe in the power of understanding and education to navigate these challenges. So, let’s dive into what’s going on and how your small business can adapt in these trying times.
The Tightening Grip of Lending Standards
Lending standards, in essence, the rules banks use to decide who gets a loan, are getting stricter. A recent Federal Reserve Board survey indicated nearly half of banks have tightened their loan standards for small businesses over the last three months. Over 50% of them expect to tighten these standards even more throughout the year.
What does that mean for you? Well, you may face higher borrowing costs, longer waiting periods, and more scrutiny when applying for a loan. But remember, forewarned is forearmed. Anticipating these hurdles can help you prepare and strategize for your business funding needs.
Interest Rates on the Rise
Another challenge is the significant increase in interest rates for small-business term loans, which have gone up by 3.42 percentage points in just the past year. As a business owner, this can make you think twice about borrowing. It might even impact some of your business decisions, like whether or not to finance that new truck or piece of equipment your business needs. This is where careful financial planning and a trusted accounting partner can be instrumental.
Cash Flow: A Persistent Worry
Cash flow is the lifeblood of any business. And, right now, many small businesses are operating with less-than-ideal cash reserves. A worrying statistic reveals that only a quarter of businesses surveyed have access to more than 60 days of cash. This situation is even more concerning for certain sectors like construction and hospitality. It’s tough, we know. But knowing your financial position can help you strategize and find ways to manage your cash flow more effectively.
The Impact of Financial Disclosure Regulations
In the wake of the Covid-19 pandemic, several states across the country introduced financial disclosure regulations to promote transparency and support small businesses. These well-intentioned laws require lenders to provide detailed loan information to borrowers.
However, the actual impact has been quite different from the intention. Many nonbank lenders, facing these new regulations, have chosen to withdraw from offering loans, leading to a reduction in the overall pool of capital available to small businesses. This means fewer lenders in the market, which can lead to increased competition and potentially higher interest rates, even for businesses in states, like Massachusetts, without these regulations.
A Ray of Hope: Online Financing
Despite the tightening of traditional lending standards, there are still opportunities for small businesses to secure the funding they need. While digital platforms like Amazon and Shopify have provided new avenues of financing for online businesses, there are other alternative sources of funding that can be a lifeline for businesses in other industries.
For instance, peer-to-peer lending platforms, crowdfunding, and the Small Business Administration (SBA) offer potential financing options for businesses of all types. Additionally, personal credit can serve as a resource, with some businesses turning to personal credit cards for funding when other options are limited. However, it’s essential to navigate these options carefully, considering the interest rates and terms associated with each.
At Ten Key, we can help you explore these alternative funding sources, ensuring that you understand the implications and can make an informed decision about the best financing options for your business.
Charting the Course Ahead: What Are the Next Steps?
It’s clear that the tightening of lending standards presents a significant challenge for small businesses. Whether it’s due to rising interest rates, increased regulatory scrutiny, or shifting economic conditions, these changes can make it more difficult for businesses to secure the funding they need to grow and thrive. However, it’s not all doom and gloom.
Despite these obstacles, there are still viable options for businesses seeking financing. From building a solid financial foundation and maintaining a good credit history, to developing a strong business plan and networking with other business owners, there are steps businesses can take to improve their chances of securing a loan.
Furthermore, alternative sources of financing, including peer-to-peer lending platforms, crowdfunding, and programs offered by the Small Business Administration (SBA), present valuable options for businesses of all types and sizes. Even personal credit resources can play a role in some circumstances.
Contact Ten Key
At Ten Key, we understand that every business’s situation is unique. We’re here to help you navigate these challenges and explore all the options available to you. Together, we can work towards finding the best financing solutions to support the growth and success of your business.