July 14, 2024


Taste For Business

Small business owners feel ‘hit to the throat’ when applying for bank loans

Small business owners often face hurdles trying to borrow money.

Data from the Federal Reserve shows that 85% experienced financial difficulties in 2021. And during that time, more than half of owners who sought loans were looking to meet their operating expenses rather than to expand their businesses, the report found.

In addition, small business owners are also feeling the sting of higher prices.

Inflation in the country is now running at annual 7.9% for the 12-month period ended February, according to recent data from the U.S. Bureau of Labor Statistics. That’s the highest since January 1982. In response, the Federal Reserve is raising interest rates — signaling that cost of borrowing money is going up.

Even in normal times, small businesses struggled to get loans from traditional banks because “the underwriting models are really designed to take a look at like multiple years of historical financials to risk assess whether they can deploy that capital,” said Nick Mathews, CEO of Mainvest, an investment platform that aims to connect small business owners and investors.

“The banks don’t really know how to reconcile their traditional models to this crazy level of variability,” he said about why loan applicants are more likely to get turned down or receive less money compared to before the pandemic.

“The underwriting models that banks use are designed on consistency, and so when you lack that consistency for multiple years, it makes it really challenging for large institutions in order to adapt to that,” Mathews added.

Bobby Morelli and his nine-year-old daughter outside of their small biz, The Hot Dog Box

Bobby Morelli and his nine-year-old daughter outside of their small biz, The Hot Dog Box

Bobby Morelli, owner and co-founder of The Hot Dog Box, a restaurant in Chicago, tried to apply for a Small Business Administration (SBA) loan back in 2020. But the under the SBA process, he didn’t qualify because he “hadn’t been in business for two years prior.”

“It was sort like a hit to the throat,” Morelli told Yahoo Finance in an interview. “I had a little bit of money saved from my years of working and stuff like that. [But] not being able to access funding, the traditional route, I felt that what it was putting a halt on our growth.”

Unable to convince a traditional bank to give him a loan, Morelli, who runs the business with the help of his 10-year-old daugher, looked for other another source of capital — crowdsourced loans.

“It kind of disarms a lot of the red tape that you’ll go through with the traditional funding sources, and you’re not tied down to those stingy options, if you will,” Morelli said.

Morelli turned to Mainvest, which provided crowdsourced loans at low interest rates to restructure his debt.

“At the time our goal amount was $20,000, and we met our goal within 10 days and once you get that, you set your interest payment. I think our interest is like 1.6%,” Morelli explained.

Morelli isn’t alone. Data from the 2022 JPMorgan Chase Business Leaders Outlook survey, shows that small business leaders are increasingly seeking untraditional ways to reach their goals.

Nearly half of small businesses plan to use business credit cards to help raise capital — up from 38% a year ago — with line of credit funding being the next most common funding method. And 68% of small businesses also plan to explore online lending options — up from 56% a year ago, the survey found.

Data from online lender Biz2Credit, in February, big banks approved 14.7% of loan requests — which was down from 28.3% in the same month in 2020. And small banks approved 20.5% of loan requests, down from 50.3% in the same month in 2020.

According to Molly Day, vice president of public affairs at the National Small Business Association, one way to help struggling business owners is to change lending rules to allow “community credit unions to lend more to businesses. They’re only allowed to lend up to a certain percentage of their total assets to businesses and to small businesses. If we could raise that cap, that would be a huge help because credit unions are in the communities, they know these people you’re gonna get more of those character base loans.”

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv

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