Rising rates, recession worries chill small-business lending

It’s been a challenging lending market with capital being more expensive given rising interest rates and some lenders being more conservative amid recession fears.

Notably, small business loan approval percentages at big banks slipped to 14.4% in January, according to the latest Biz2Credit Small Business Lending Index. That’s the seventh consecutive drop since June 2022 when it was 15.4%.

The lending climate may remain challenging going forward, but local financing experts say there’s still capital available.

“Demand is strong and we’re busy,” says Joseph Camberato, CEO of National Business Capital, a Hauppauge-based firm that assists small- and medium-sized businesses in getting financing. He didn’t disclose financing amounts, but described December’s as a record in the firm’s 15-year history.

Camberato has found that traditional lending institutions tightened up last year and sees that continuing, but says there was growth in alternative lending, which is generally lending outside of traditional financing institutions such as banks and credit unions.

According to the Biz2Credit’s CEO Rohit Arora, approval percentages of alternative lenders increased from 27.6% in December to 27.8% in January.

Camberato says that on the plus side for borrowers, approvals at alternative lenders could be quicker, like 1 to 7 days compared with 45-plus days at traditional banks. They often also require less collateral. But interest rates could be higher, he says.

Another option with which many clients have found success is Small Business Administration loans, says Troy Diaz, a business adviser at the Small Business Development Center at Farmingdale State College.

For most 7(a) loans (the agency's most common loan program), the SBA can guarantee up to 85% of loans of $150,000 or less, and up to 75% of loans above $150,000. Diaz says the interest rates are generally variable on these loans with some approaching 11% presently.

Still, “loan rates are just one aspect of a larger picture,” he says. “If the funding will help grow your business and makes sense, then that’s something you need to consider.”

Swetang Patel, owner of A2Z Distributors in Plainview, a full-service distributor of food, snacks, beverages, tobacco and candy, says his interest rate is variable and presently about 10% with his 7(a) SBA loan.

Last April, he secured a $1 million 7(a) SBA loan with Dime Bank and is now seeking an additional $4 million SBA loan. He continues to expand his business and is looking to grow his warehouse from 15,000 square feet to 50,000 square feet by midyear.

He was initially concerned about approaching lenders given the economic climate, but he says the Farmingdale SBDC was invaluable in helping guide him through the process. Outside of SBDCs, there are other resources such as La Fuerza Community Development Corp. in East Norwich, which provides microloans, complimentary business training and credit counseling to minority and women-owned small businesses.

La Fuerza executive director Giovana Bracchi, says for alternative lenders like a Community Development Financial Institutions fund, there’s been an uptick in applications and approvals. “People are looking into CDFIs and SBA programs, where the funding is up to 85% guaranteed,” by the government, Bracchi says. And some other programs like the Empire State Development Small Business Revolving Loan Fund are focused on small businesses that have difficulty accessing regular credit markets.

But that doesn’t mean traditional lenders aren’t lending. Last year, “we did more small business lending here on Long Island than we did in 2021,” says Vincent DiCicco, vice president and an area manager for Chase Business Banking’s Long Island market.

Part of that was due to Chase’s efforts to “improve our credit process," says Mikal Quarles, managing director and head of diverse strategies for Chase Business Banking. This involved simplifying the application process and reducing the amount of required documentation, he says.

The goal by year-end is to make credit decisions the same day as the application, he says. DiCicco says in many cases now in the last six months, clients have gotten approved and funded in a couple of days.

They also developed a Special Purpose Credit Program to expand credit access to businesses in majority Black, Hispanic and Latino communities, Quarles says. “We’ve seen great progress and a very positive trend.”

But even if capital is available, businesses have to consider if it’s the right time to borrow. given the economic climate, says Joe Tedesco, president/CEO of Ocean Financial Federal Credit Union in Oceanside. “If you’re going to buy a piece of equipment, consider it’s now more expensive with higher interest rates, and you are going to need to pay an employee more to run it,” he says.

For borrowers, it comes down to total cost and risk versus reward, he says. When lending, the credit union typically looks at the last three years of financial statements; anticipated revenues for 2023; and if the borrower is prepared to weather a potential recession, Tedesco says.

By Jamie Herzlich

jherzlich@aol.com

Herzlich writes the Small Business column in Newsday.