Small Businesses Could Face Borrowing Challenges
According to an October 2023 survey, higher interest rates impacted more than half of small businesses, and over 20% reported that higher rates and tighter lending standards influenced their hiring decisions.1
Small businesses paid an average rate of 9.1% for short-term loans in October 2023, the highest rate since 2006, and nearly twice as much as they were paying just two years ago (4.6% in August 2021).2
Despite tougher conditions and higher costs, many people who need working capital or want to start, invest in, or expand a business may need to borrow money. Here’s a rundown of some common financing options.
Bank loans. National and regional banks cater to the most creditworthy businesses, as they generally require significant collateral and documentation of stable profits. New or fast-growing small businesses — even healthy ones with good prospects — are often rejected. Small banks, however, tend to have higher approval rates than large banks.3
SBA programs. In fiscal year 2022, the U.S. Small Business Administration (SBA) provided more than $43 billion in financing, in many cases to guarantee loans issued by participating banks.4 The program often makes it easier to qualify for financing and may offer more competitive terms and longer repayment periods. However, traditional SBA loans also require “worthwhile” collateral, and it can take several months for qualified borrowers to complete the application process (through a local bank or online) and receive the funds.
Other lenders. A newer crop of online lenders using digital technology to approve smaller, short-term loans can sometimes make it easier to access cash quickly, but they often charge higher interest rates and fees. Some loans may need to be backed by business assets such as securities, equipment, inventory, and accounts receivable.
Reasons that small firms applied for loans, lines of credit, or cash advances (percentage of applicants)
Source: 2022 Small Business Credit Survey, Federal Reserve, 2023
HELOCs. Homeowners may have an extra source of funds to tap into for business needs. A home equity line of credit, or HELOC, is a secured loan that may offer more flexible repayment periods and competitive interest rates than many other types of business financing. But there is one major disadvantage to consider: if the business struggles and the owner can’t make loan payments, the lender could take the home.
Credit cards. Business accounts tend to charge higher interest rates — which could now be north of 20% — and offer fewer financial protections than personal credit cards. Using a business credit card responsibly, however, is one way that a new business could help establish the positive credit history necessary to obtain larger bank loans at better rates in the future.