For entrepreneurs looking to secure financing anytime soon, good luck.
Venture capital dried up in the first quarter of this year, and in the past few weeks, obtaining a business loan has become an epic task even Jules Verne might eschew. During the second half of March, the Federal Reserve recorded the largest two-week decrease in overall bank lending in U.S. history. The central bank data also showed the largest ever contraction in business loans over the same time period.
"The credit crunch has started," wrote Apollo chief economist Torsten Slock in a recent note that highlighted the record pullback. "The behavioral change in the banking sector is beginning to weigh on the economic outlook."
Small businesses have been hit especially hard. Last month, approval rates for small business loans fell to 13.8 percent, the lowest level since July 2021, according to the Biz2Credit Small Business Lending Index. Even at smaller banks, which are historically more likely to back local small borrowers, fewer business owners were able to obtain financing in March; just 19.1 percent of applications were approved.
This shift should not come as too much of a shock. Fears over this exact scenario began swirling after the collapse of Silicon Valley Bank. Federal Reserve Chairman Jerome Powell echoed concerns during his March 22 press conference, saying, "Events in the banking system over the past two weeks are likely to result in tighter credit conditions for households and businesses." As concerned customers pulled deposits from smaller and regional institutions, the largest lenders capitalized on that anxiety. Bank of America enjoyed record inflows, with $37 billion in deposits from new and existing customers since the the first quarter of 2022, per first quarter earnings released on Tuesday morning.
Seeing the trend lines, business owners are increasingly looking to alternative lenders to get the money need to grow. Just ask Jamahl Grace, the co-founder of the Grace+Love Candle Company. Despite having what he thinks is bankable business with 95 client boutiques across the country and year-over-year sales growth of 120 percent, Grace recently tapped an unlikely source for a loan: his accounting software provider, QuickBooks.
In about five days, the Sterling, Virginia-based business, which Grace co-founded alongside his wife in 2020, was approved for a $10,000 credit line with an 18.9 percent annual percentage rate. The lender, QuickBooks Capital, offers loans with annual percentage rates that start at 9.99 percent and can go as high as 36 percent. In 2022, the lender originated $1.3 billion in business loans ranging from $5,000 to $150,000.
The cost of these loans tends to be higher than those offered by traditional banks. During the fourth quarter of 2022, banks charged a median interest rate of 6.44 percent for new, fixed-rate small-business loans, and 6.22 percent for fixed-rate lines of credit, according to the most recent data from the Kansas City Federal Reserve.
Even so, the Graces have plenty of company. QuickBooks says 60 percent of its customers would not qualify for a loan elsewhere. Further, the Biz2Credit Small Business Lending Index found that as bank lending to small businesses declined, sign-offs from non-traditional financers overall increased. Approval rates from alternative lenders rose to 28.4 percent in March, up from 27.9 percent in February.
For Jamahl Grace, the convenience of getting the money he needed quickly outweighed the higher cost. He says he also appreciated that the terms were calculated based on Grace+Love's own historical data inputted in the software. "They're seeing all of the inflows. They're seeing all of the outflows," Grace adds. "They'll take all of those data inputs, and they'll present you an offer."
His advice for other small-business owners navigating tough credit conditions? Don't get caught up on all the nos from lenders. "It's nothing to take personal, especially given the climate of our economy and everything that's looming," he says. "Let's be honest, home fragrance isn't necessarily a necessity for people. If people were to have to choose between groceries or candles, they're obviously going to choose their groceries."
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