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New data shows how difficult it is for small businesses to borrow money as interest rates remain high and banks tighten lending standards.
The percentage of small business loan applications approved by banks over the past year has fallen, with approvals by credit unions dropping to an all-time low, according to a new report from small business financing platform Biz2Credit.
And the loans that small business owners do get are becoming more expensive: More than 40% of senior loan officers surveyed by the Federal Reserve in October reported that the cost of small business lines of credit had risen in the past few months, as had insurance premiums on riskier loans.
Plus, interest rates are soaring: The average interest rate paid on a short-term loan this month was 9.1%, up from 6.7% a year ago, according to the National Federation of Independent Business.
“It's certainly higher costs for small business borrowers,” said Holly Wade, executive director of the NFIB Research Center. “They're being forced to make decisions about how to finance projects that they might not have had to make otherwise.”
Lenders pull out due to economic reasons
According to the Biz2Credit Small Business Lending Index, large banks approved just 13% of small business loan applications in October, down from 14.7% a year earlier and 28% in October 2019, just months before the pandemic began.
Approval rates for small banks have fallen to just under 20% from more than 50% before the pandemic. Credit unions approved 19.8% of the small business loan applications they received in October.
But small business lending hasn't declined across the board: The survey found that approval rates for institutional and alternative lenders, which aren't chartered as banks or credit unions, have increased slightly.
Meanwhile, a Federal Reserve survey of senior lending officers found that more than 30% of banks have tightened approval standards for small business loans in recent months, citing economic conditions and weakening risk tolerance.
It may not be surprising then that more than half of banks reported a weakening in demand for small business loans over the past few months.
What can small business owners do?
Although small business lending has gotten tougher, Wade says there's still hope for business owners who can't find the loan they want. “Establish a relationship with a banker who specializes in small business lending,” she advises, and discuss what you'll need to get a loan or what other options you have.
“Having those discussions with your bank can be extremely beneficial, but I think it's a conversation that doesn't immediately spring to mind for many owners,” Wade added.
Business owners who can't get financing from a traditional bank or credit union may need to consider alternative options like online lending, peer-to-peer lending, merchant cash advances and invoice factoring. However, some of these methods may have higher interest rates or other risks, so it's important to understand the terms and conditions before proceeding.