Recent stress in the US banking sector and skyrocketing interest rates have sparked rumblings of a credit crunch for US small businesses that threatens to dent economic growth.
A net 9% of regular borrowers reported more difficulty obtaining a loan in March than three months earlier, the largest drop in loan availability since 2012, according to the latest monthly survey by the National Federation of Independent Business (NFIB). In addition, a net 26% of small companies surveyed said they paid a higher interest rate on their most recent loan than on loans paid three months earlier, the largest jump since 2006, as the percentage of businesses planning new investment fell to a two-year low.
The increased difficulty in obtaining loans has been compounded by banking turmoil, concerns about a recession and the Federal Reserve's push to cool inflation through higher interest rates.. The combined forces mean small businesses risk losing access to capital to hire and expand, potentially limiting their contributions to a US economy that economists already expect to contract this year.
"It's a combination of everything right now," said Holly Wade, executive director of the NFIB research center.
Economic dents
As credit to small businesses continues to tighten, economic growth will likely stumble as construction work is put on hold, manufacturers delay expansion plans and businesses decide to wait to expand hiring. Businesses with fewer than 100 employees account for about 35% of the private sector workforce in the US and produce about one-quarter of gross output, according to the latest government data.
"Smaller loan growth could undermine the growth of economic activity," said Joel Prakken, chief US economist at S&P Global Market Intelligence.
With higher interest rates, banks across the country are having to pay up in order to compete for deposits. The overall industry has been recording deposit outflows and a lack of liquidity is, in part, motivating banks to curtail lending .
Banks may view loans to small businesses as riskier, and as lending standards strengthen, smaller businesses may lose access to the credit they have relied on for years, an outcome that could contribute to the start of the next US recession.
Bank failure
Data on small business loan availability is likely to worsen in April since many of the responses to the NFIB's latest survey came before the March 10 collapse of Silicon Valley Bank and the subsequent stress throughout the sector.
"Even before strains emerged, lending has become more cautious over the past few months as the risks of recession have risen," said Charles Dougherty, a senior economist at Wells Fargo. "Higher interest rates certainly have a played a role as well, making capital more costly in order to contain inflation pressures."
The prime rate, one of the interest rates used by banks to price short-term business loans, has jumped from 3.25% to 8% since the Fed's rate hikes began. The increased cost of loans has slowed demand for them, while supply has also been jolted by banking sector turmoil, Prakken with Market Intelligence said.
"You now have the prospect that at any given interest rate, banks will become less generous in their lending," Prakken said.
Banks are now more likely to hold back on loans in order to protect capital ratios and reduce the risk of a possible deposit run or sudden decline in loan quality if the economy weakens, Prakken added.
In March, the number of commercial and industrial loans grew by 10.1% from a year earlier, the smallest growth since June 2022.
A March banking conditions survey from the Federal Reserve Bank of Dallas found that nearly 47% of banks in the region reported a decrease in loan volume over the past six weeks, while about 38% reported that credit standards and terms had tightened over that time.
Companies with current lines of credit may have more difficulty renewing them in the near future, with banks scrutinizing the quality of loans more heavily and unveiling additional requirements, such as increasing the amount in balances a loan recipient must keep at the bank, Prakken said.
Disproportionate impact
Turmoil in the banking sector, which primarily affected midsized banks, is likely to impact smaller businesses most severely since they rely disproportionately on small and midsize banks for loans, according to an April 11 paper from Ronnie Walker and Manuel Abecasis, economists at Goldman Sachs.
Small businesses with fewer than 100 employees receive about 70% of their commercial and industrial loans from banks with less than $250 billion in assets. In addition, smaller businesses will be unable to quickly and cheaply replace these banks as a source of credit since they are unable to tap public debt markets and often have few nonbank lending options, such as hedge funds, Walker and Abecasis wrote.
"Because small banks are likely to tighten credit more aggressively and small businesses disproportionately borrow from them, the hit to lending to small businesses will likely be larger," Walker and Abecasis wrote.