NEW YORK — Small businesses are still struggling with the pandemic and now high inflation — and they’re finding it difficult to get a loan to help them with day-to-day tasks.
A survey recently released by the Federal Reserve shows how the pandemic has changed the financial landscape for small businesses. About 85% experienced financial difficulties in 2021, up nearly 20 percentage points from 2019. At the time, more than half of homeowners applying for a loan were looking to expand; last year, the majority of applicants needed funds just to cover day-to-day operating expenses.
Meanwhile, inflation is the highest in decades, with prices for raw materials and finished goods soaring and workers demanding higher wages. The Federal Reserve raises interest rates in response, which means the cost of borrowing money goes up.
Even in normal times, it can be difficult for small businesses to obtain loans from traditional banks, as they lack the assets and credit history of larger businesses. During the pandemic, banks have been more stingy, outside of COVID-related programs. Two years later, loan applicants are more likely to be turned down or receive less money than they applied for compared to before COVID-19.
When the building she rented came up for sale, Letha Pugh knew she would have to move 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 loan from the Small Business Administration last July. But the process, involving a community development finance institution and a local bank, First Merchants Bank, dragged on.
Pugh worried that another buyer would rush in with cash and buy the building she was contracted for. Finally, in January, she got approval for a $780,000 loan.
While Pugh is glad everything went well, the episode shows just how difficult and stressful it can be for a small business to secure funding.
“One night I hung up the phone and started bawling because I was so frustrated, all these things were happening, not because of me, but because of bureaucracy and bureaucracy,” she said.
Only about 30% of businesses that applied for funding last year got the full amount they requested, up from about half in 2019. Businesses owned by people of color, businesses with fewer employees and leisure and hospitality businesses were the least likely to receive the full amount of funding sought. Around 68% of applicants obtained part of the requested amount, compared to 83% in 2019 and 76% in 2020.
Todd McCracken, president of the National Small Business Association, an advocacy group, said the current lending environment could make it harder for small businesses trying to recover from the pandemic. Their balance sheets, which banks look to when assessing loan applications, have been weakened during the pandemic, although their outlook is bright.
“Past performance is not really a good indicator of future potential,” he said.
In February, large banks approved 14.7% of loan applications, compared to 28.3% in February 2020. And small banks approved 20.5% of loan applications, compared to 50.3% in the same month in 2020. That’s according to online lender Biz2Credit, based on data from more than 1,000 small business owners who applied for funding on the company’s platform.
Banking greed has led business owners to consider other options such as community banks, online lenders and crowdfunding sites. Homeowners were more likely to apply for a loan online last year than in 2020, while applicants were less likely to seek financing from a small bank, the Fed survey found.
There are trade-offs, however: alternative loans may be easier to obtain, but they likely come with higher interest rates or steep penalties. Typically, small business loans from traditional banks carry interest rates of 3% to 7%, while online loan rates vary widely but can be 10% and higher.
“The good news is that small businesses have plenty of options, although they may not be the cheapest,” said Matt Schulz, chief credit analyst at online lending marketplace LendingTree.
Business for Cache, a Sandy, Utah-based company that sells truck accessories, has boomed during the pandemic. But this unexpected success left the company in a financial bind.
Co-founder Tyler Green realized the company needed to ramp up manufacturing. Meanwhile, shipping costs have gone from $2,500 per shipping container to $26,000.
Green and his business partner went to their bank to apply for a $50,000 to $100,000 loan, but were told they didn’t qualify for such a large loan. Another problem: as a new money-making company, Cache was also ineligible for pandemic relief. And being a manufacturer, the company needed funds quickly.
So the owners turned to QuickBooks’ lending arm, QB Capital. They got a loan in three days. That’s $15,000 with a 10% interest rate. It doesn’t cover everything, but it’s essential to keep the business going in the short term.
“It was really something that really saved our business,” Green said.
Equity loans are another option for small businesses.
Since founding Hugo Coffee Roasters in Park City, Utah, in 2015, Claudia McMullin has been unable to convince a traditional bank to give her a loan. She said she didn’t have the historic cash flow that banks like to see.
“Small businesses are stuck in this twilight zone between we need capital to grow, but we can’t get capital to grow because we don’t qualify because we haven’t grown yet,” McMullin said. .
She used her own money and borrowed from friends and family to help fund the business. Then last year, she received a large purchase order from a grocery chain for beans that she didn’t have enough money to pay for.
McMullin took out a loan from an online lender, which she called “a lifeline at the time.” But the terms were strict with payments due weekly, and she struggled to pay them.
“It only works if you get in and out quickly,” she said. “Now I feel like it’s killing me and killing my cash flow.”
She turned to Kiva, which offers equity loans at low interest rates, to restructure her debt. McMullin’s $25,000 loan bears 0% interest with an 18-month repayment period. Kiva says it will work with borrowers who cannot repay a loan within the specified time, although a default makes them ineligible for additional loans.
Online lenders aren’t the only option for traditional banks. For Suzan Hernandez, finding support from community organizations was key to helping her navigate the loan process.
Hernandez founded MamaP, which sells personal care products that reduce plastic like bamboo toothbrushes and laundry detergent sheets, in 2019. She found a mentor through the JP Morgan Chase Minority Business program, and the mentor advised him to join groups like New Jersey. Hispanic Chamber of Commerce and New Jersey Small Business Development Corp. for their support.
She is looking for a $500,000 loan or line of credit. She applied for different loans from community lenders and SBA-backed banks for about eight weeks. Although it takes time, she said the process was worth it because of the low rates offered – interest rates range from 3-6%.
“Right now, working with reps to figure out what we’re eligible for and what’s required is a lot of paperwork,” but it’s worth it, she said. “It’s been good. Because it is not a simple loan from a conventional bank, they were more favorable.