Small businesses that need a loan find that banks are stingy

Suzan Hernandez, founder of Mama P, poses for a photo in Jersey City, NJ, on March 22, 2022. With the money to deal with the pandemic greatly depleted and the cost of goods and labor the highest here and there. For years, many small businesses have been looking for new financing, with mixed results.  For Hernandez, finding support from community agencies was the key to helping her navigate the lending process.  (AP Photo / Seth Wenig)

Suzan Hernandez, founder of Mama P, poses for a photo in Jersey City, NJ, on March 22, 2022. With the money to deal with the pandemic greatly depleted and the cost of goods and labor the highest here and there. For years, many small businesses have been looking for new financing, with mixed results. For Hernandez, finding support from community agencies was the key to helping her navigate the lending process. (AP Photo / Seth Wenig)

NEW YORK – Small businesses are still facing the pandemic and now high inflation – and find it difficult to get a loan to help with everyday life.

A recent study by the Federal Reserve shows how the pandemic has changed the economic landscape for small businesses. About 85% faced financial hardship in 2021, an increase of almost 20 percentage points from 2019. At the time, more than half of homeowners seeking a loan were trying to expand. last year, the majority of applicants needed funds only to cover their daily operating expenses.

Inflation, meanwhile, is at its highest level in decades, with raw materials and finished products soaring and workers demanding higher wages. The Federal Reserve raises interest rates in response, which means borrowing costs are rising.

Even in normal times, it can be difficult for small businesses to get loans from traditional banks because they do not have the assets and credit history of larger companies. During the pandemic, banks were more stingy, except for COVID-related programs. After two years, loan applicants are more likely to be rejected or receive less money than they requested before COVID-19.

When the building she leased went up for sale, Letha Pugh knew she would have to relocate her business. So she decided to buy and renovate her own building.

Pugh, co-founder of Bake Me Happy, a gluten-free bakery in Columbus, Ohio, applied for a small business loan last July. But the process, involving a Community Development Financial Institution and a local bank, First Merchants Bank, has stalled.

Pugh was worried that another buyer would come in with cash and buy the building for which he had a contract. Finally, in January, he got approval for a $ 780,000 loan.

While Pugh rejoices that it all worked out, the episode shows how difficult and stressful it can be for a small business to find financing.

“One night I got off the phone and started screaming because I was so frustrated, it was all happening, not because of me, but because of the bureaucracy and the bureaucracy,” he said.

Only about 30% of companies that applied for funding last year received the full amount they requested, up from about half in 2019. Colored companies, companies with fewer employees, and leisure and hospitality companies were the least likely to receive the full the amount of funding requested. About 68% of applicants received part of the amount requested, from 83% in 2019 and 76% in 2020.

Todd McCracken, president of the National Small Business Association, a defense team, said the current lending environment could make it tougher for small businesses trying to recover from the pandemic. Their balance sheets, which banks are examining to evaluate loan applications, weakened during the pandemic, even if their outlook is favorable.

“Past performance is not really a good indicator of future potential,” he said.

In February, large banks approved 14.7% of loan applications, up from 28.3% in February 2020. Small banks also approved 20.5% of loan applications, up from 50.3% in the same month in 2020. This, according to online lender Biz2Credit, which is based on data from more than 1,000 small business owners who have applied for financing on the company’s platform.

Banking avarice has led business owners to consider other options, such as community banks, online lenders and crowdfunding sites. Homeowners were less likely to apply for an online loan last year than they were in 2020, while applicants were less likely to seek financing from a small bank, according to a Fed survey.

However, there are exchanges: Alternative loans may be easier to obtain, but may be accompanied by higher interest rates or higher penalties. Usually, small business loans from traditional banks have interest rates from 3% to 7%, while online loan interest rates vary widely, but can be 10% or more.

“The good news is that small businesses do have a lot of options out there, although they may not be the cheapest options,” said Matt Schulz, chief credit analyst at LendingTree.

The company in Cache, a company based in Sandy, Utah that sells truck accessories, flourished during the pandemic. But this unexpected success left the company in a financial bond.

Co-founder Tyler Green realized the company needed to boost production. Meanwhile, shipping costs skyrocketed from $ 2,500 per shipping container to $ 26,000.

Green and his partner went to their bank asking for a loan of $ 50,000 to $ 100,000, but were told they were not eligible for such a large loan. Another problem: As a new money-making company, Cache did not qualify for pandemic assistance. And as a manufacturer, the company needed funds in a hurry.

So the owners turned to Quickbooks lending arm, QB Capital. They got a loan in three days. It is $ 15,000 with an interest rate of 10%. This does not cover everything, but it is necessary to maintain the business in the short term.

“It’s really something that really saved our business,” Green said.

Crowdsourced loans are another option for small businesses.

Since the founding of Hugo Coffee Roasters in Park City, Utah, in 2015, Claudia McMullin has failed to persuade a traditional bank to lend her a loan. She said she missed the historic cash flow that banks like to see.

“Small businesses are stuck in this twilight zone between the fact that we need capital to grow, but we can not get capital to grow because we do not qualify because we have not yet grown,” McMalin said.

She has used her own money and borrowed from friends and relatives to help finance the business. Then last year he got a large purchase order from a grocery chain for beans that did not have enough money to pay.

McMullin took out a loan with an online lender, which he called “a savior at the time.” But the terms were strict with the payments due on a weekly basis, and he found it difficult to repay it.

“It only works if you go in and out quickly,” he said. “Now, I feel like it kills me and kills my cash flow.”

He turned to Kiva, which offers low-interest loans, to restructure its debt. McMullin’s $ 25,000 loan has an interest rate of 0% with an 18-month repayment period. Kiva says it will work with borrowers who can not repay a loan on time, although a default makes them ineligible for additional loans.

Online lenders are not the only option for traditional banks. For Suzan Hernandez, finding support from community agencies was the key to helping her navigate the lending process.

Hernandez founded MamaP, which sells personal care products that reduce plastics, such as bamboo toothbrushes and laundry detergents, in 2019. She found a mentor through the JP Morgan Chase Minority Business Program and the mentor advised her to join teams. the New Jersey Spanish Chamber of Commerce and the New Jersey Small Business Development Corp. for support.

Looking for a $ 500,000 loan or credit line. He has applied for different loans from community lenders and SBA-backed banks for about eight weeks. Although time consuming, he said the process is worth it because of the low interest rates on offer – interest rates range from 3 to 6%.

“Right now, working with representatives to understand what we are entitled to and what is required is a lot of bureaucracy, but it is worth it,” he said. “It was good. “Because these are not a simple loan from a conventional bank, they were more supportive.”

Mae Anderson is an AP Business writer.

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