Small Businesses Hit Hard by Credit Crunch

Small businesses are feeling the pinch as lenders, particularly small and midsize banks that serve small businesses, tighten credit due to outflows of deposits and uncertainty about the economy. The latest Biz2Credit Small Business Lending Index showed that the approval rates of small business loan requests at big banks have fallen for nine consecutive months. The larger banks approved just 14.2% of applications in February 2022, down from 28.3% in February 2020. Small banks granted about 20% of loan applications in February 2022, but they were approving about half of all requests back in early 2020, before the pandemic hit.

The credit crunch is having a significant impact on small businesses, a big job creator and source of innovation for the economy. For example, Basic Fun, a maker of toys such as Care Bears and Lincoln Logs, had to temporarily shelve plans for an acquisition due to the crunch. Companies that have existing lines of credit are also feeling the pain, with interest rates increasing.

The credit tightening is affecting small businesses more than larger ones because smaller businesses have fewer levers they can pull to get financing. In the UK, Dawn Barber, the founder and managing director at Web Shop Direct, has delayed some expansion plans because credit terms have gotten stricter. Her business is essentially self-funded, but when she recently turned to PayPal for extra funding, the financial terms were stricter compared to a year ago.

The credit crunch is expected to affect small businesses even more in the coming months, with some lenders forced to tighten credit further. This will help slow down the economy and ease inflation, which is what the Federal Reserve hopes to achieve by hiking interest rates. However, it means that small businesses will be left in the lurch.