Fewer than one-third of small-business owners who sought traditional financing last year received all of the funding they wanted — a steep drop from before the pandemic, according to new Federal Reserve Bank research.
Back in 2019, some 51% of U.S. small businesses received the total financing they were seeking from their bank, according to Fed survey data published Tuesday. That number fell to 36% in 2020 and just 30% last year.
“Financing access is certainly lower now than it was,” a Fed official who worked on the survey said during a call with reporters.
The latest data supports the hypothesis that underwriting standards for commercial clients are diverging based on their size, as banks grapple, two years into the pandemic, with what risks they’re willing to take. In a separate survey conducted by the Fed earlier this year,
The survey published Tuesday included results from 11,000 small-business owners, more than half of whom reported that they were in fair or poor financial condition last year. Tighter access to credit was one reason, according to the Fed officials.
Lenders often look at the performance of a small business over the previous two years before making a decision on a loan. As banks receive applications this year, underwriters are having a difficult time weighing the effects of the pandemic, even on small businesses with good credit scores, officials said.
According to the survey, 38% of small businesses that were considered a low credit risk received all the funding they sought last year, compared with 45% in 2020.
“Our survey finds that many businesses, especially those with good credit scores, felt that the lenders were being too strict in their criteria,” said one of the Fed officials who worked on the survey.
Those small businesses that applied last year for loans under the federal Paycheck Protection Program were also less likely to receive all of the funding they were seeking in comparison with the previous year. Some 67% of PPP applicants received the full funding they were seeking in 2021, versus 76% in 2020, according to the survey.
As small businesses have a tougher time getting financing, their reasons for applying for loans have shifted. About 63% of small-business owners who applied for a loan last year said they were trying to keep up with higher operating expenses, like rising wages and inventory prices, according to the Fed survey. In 2019, only 43% of respondents cited that reason.
And just 41% of the survey respondents said they were looking to use a loan to help expand their business, compared with 56% who cited growth plans as their reason for applying in 2019.
The Fed’s survey also found stark racial differences among small-business owners. About 14% of Black and Asian business owners, and 19% of Hispanic business owners, received all the funding they sought from their lender last year, compared with 34% of white business owners, according to the Fed.
Back in 2019, 26% of Black small-business owners, 32% of Hispanic small-business owners and 34% of Asian small-business owners received all the funding they were seeking, compared with 54% of white small-business owners.
“It is not a smooth path forward for all businesses,” one of the Fed officials said.
