CHARLOTTE, N.C. — When Nadia Ferreira went to her bank this summer to borrow $150,000 for a second location of her bakery, she expected a routine conversation. She had eight years of profits, a clean credit history and a lease ready to sign. Instead, she was told the bank wanted a larger down payment, a personal guarantee backed by her home and two more years of tax returns.
“I have been their customer since the day I opened,” Ferreira said. “It felt like they were looking for a reason to say no.” Her experience is increasingly common. A quarterly survey of about 1,200 small-business owners released this week by the Main Street Finance Council found that 34 percent of those who applied for credit in the past three months were turned down or offered less than they requested, the highest share since the survey began eight years ago.
Why credit is tighter
Bankers say the squeeze reflects a mix of caution and cost. Interest rates remain well above where they were a few years ago, which raises monthly payments and makes some borrowers look riskier on paper. Many community and regional banks have also become more careful after deposit outflows in recent years and are holding more cash in reserve.
We want to lend to these businesses. They are our neighbors. But when a loan costs nine or ten percent, the math gets harder for the borrower and for us, and we have to be sure the payments work.
Kevin Abernathy, president, Piedmont Community Bank
Abernathy said his bank has not stopped small-business lending but is asking for more documentation and shorter loan terms, especially for restaurants and retailers, where profit margins can swing sharply.
Turning to costlier options
Some owners who are turned down are moving to online lenders and merchant cash advance companies, which can approve money in days but often charge far higher effective rates. Advocates warn that those products can trap businesses in cycles of repeat borrowing.
- 34 percent of applicants denied or partly approved, up from 22 percent two years ago
- 9.6 percent average rate on new small-business bank loans
- 41 percent of owners say they have postponed hiring or expansion
- 1 in 5 owners used a credit card or personal savings to cover a cash gap
Rosa Delgado, who runs a small-business counseling program at a Charlotte nonprofit, said the number of clients asking for help understanding loan offers has roughly doubled this year. “We see contracts where the yearly cost works out to 50 percent or more, and the owner had no idea,” she said. “We spend a lot of time just translating the paperwork.”
Government-backed loan programs remain an option, and several state agencies have expanded small loan guarantee funds. But owners say those programs can take months to process and require paperwork that small firms without an accountant find difficult.
Economists are watching the squeeze closely because small businesses account for a large share of new hiring. If credit stays tight, some warn, job growth could slow in sectors such as food service, construction trades and personal services.
Others are less worried, noting that loan demand is also down because many owners are choosing to wait for lower rates. “Part of this is banks being cautious, and part of it is borrowers being sensible,” said Stephen Okoro, an economist at Carolina Commerce University.
Ferreira eventually found financing through a local credit union, at a slightly higher rate and with a smaller loan than she wanted. She now plans to open the second bakery next spring, with a smaller kitchen. “We’ll grow,” she said. “Just slower than I hoped.”
