As banks tighten their lending standards in response to turmoil in the industry, it’s small businesses that are suffering, according to The Wall Street Journal (subscription).
What’s going on: “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.”
Not your imagination: Close to half of all banks reported having tightened their lending standards in the past three months, according to a Federal Reserve Board survey cited by the Journal.
- “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 is 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 Federal Reserve rate increases,” one source told the newspaper.
Why it’s important: More stringent loan rules are forcing smaller companies—which tend to borrow from small banks—to put off or cancel expansions and consider bringing in equity investors.
- “‘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.”
- Some banks are telling small businesses to seek Small Business Administration loans, which “carry a government guarantee” but tend to have higher interest rates than their conventional counterparts.
The last word: “Manufacturers—particularly small and medium-sized firms—are closely following developments related to access to credit, with an eye on the tightening of lending standards that were occurring even before the recent banking crisis,” said NAM Chief Economist Chad Moutray.
- “Businesses need credit to be able to expand their operations, and any pullback in that access could have consequences.”