This tightening of credit could lead to decreased capital expenditures and slower payroll growth in the future. Banks continue to tighten their lending standards to levels approaching those seen during the pandemic as policymakers consider stricter regulations to prevent the bank crisis from spreading. Yet the survey did find that more business owners reported that it was harder to get a loan than in the past. In addition, a monthly survey on small business economic trends conducted by the National Federation of Independent Business, a lobbying group, found that overall optimism remained high in March, the latest data available. In those cases, credit tightening may very well have been the consequence of the downturn, as opposed to the cause. banks that say they’re tightening credit standards versus loosening them is at a level that has preceded the past few recessions.īut the money supply was already very elevated, commercial bank lending has recovered somewhat since March, and this is the first time in decades that credit has tightened as a result of rate increases, which is different from other recent recessions. Bank lending fell in March by the most since the Fed began compiling the data in 1975. For example, the money supply is shrinking at the fastest pace since 1960. The stories warning of a crunch point to a variety of statistics. Whether or not the current banking turmoil is creating a serious credit crunch for small businesses remains an open question. The last time small businesses faced similar financing challenges was during the 2008 financial crisis, when 1.8 million small businesses failed. This could have implications for employment and commercial real estate, leading to further slowdowns in growth. While large companies have a range of financing options at their disposal, such as raising capital by selling stock or issuing convertible bonds, small businesses generally rely on bank loans for over 90% of their financing.Ĭonsequently, if bank lending becomes harder to come by, they may need to cut spending or seek alternative sources of more expensive capital to continue investing and expanding. After individual savings, the second- most common source of capital to start a business is loans from a bank, so the ability to access capital is crucial for businesses – a lack of financing is often cited as the primary reason for failure. At the end of 2022, small businesses owed nearly $18 trillion in debt.Ībout 70% of small businesses have at least some outstanding debt, which they use to help cover basic operating expenses like wages, rent and inventory, as well as to invest in new equipment and the like. Small businesses don’t borrow a lot of money, with the average size of their debt just US$195,000. And yet collectively they account for half of all private-sector workers and 44% of private-sector output.Īnd virtually all for-profit companies are considered small businesses. economy.Īlmost all of them, however, employ fewer than 20. But this can be particularly detrimental to small businesses, which have limited resources to sustain their growth and rely heavily on regional bank financing, currently the most stressed pocket of lending.ĭespite their size, small businesses – typically defined as companies with under 500 employees – are a very important part of the U.S. Concerns about the availability of credit have also risen as a result of a spate of bank failures, including that of First Republic on May 1.Ī decline in the availability of loans and other financing poses problems for all types of companies. That’s in large part brought on by the actions of the Federal Reserve, which has been raising borrowing costs for companies and consumers for over a year in an effort to tame inflation and lifted rates by another quarter point on May 3, 2023. economy – are beginning to feel the pinch of tighter credit conditions as the Federal Reserve continues to increase borrowing costs.Ī flurry of headlines in recent weeks has suggested a credit crunch – meaning the availability of lending gets scarcer – is already happening. Small businesses – the heartbeat of the U.S.
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