Small business owners feel ‘hit in the throat’ when applying for bank loans

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Small business owners often face obstacles when trying to borrow money.

Federal Reserve data shows 85% experienced financial hardship in 2021. And during that time, more than half of homeowners who applied for loans were looking to meet operating expenses rather than expand their business. company, according to the report.

Additionally, small business owners are also feeling the effects of rising prices.

Inflation in the country now stands at 7.9% annually for the 12 months ending in February, according to recent data from the US Bureau of Labor Statistics. This is the highest since January 1982. In response, the Federal Reserve raises interest rates, signaling that the cost of borrowing money is rising.

Even in normal times, small businesses have struggled to get loans from traditional banks because “the underwriting models are really designed to look at multiple years of historical financial data to assess whether they can deploy that capital,” said Nick Mathews, CEO of Mainvest, an investment platform that aims to connect small business owners and investors.

“Banks don’t really know how to reconcile their traditional models with this insane level of variability,” he explained, explaining why loan seekers are more likely to be turned down or receive less money than before. the pandemic.

“The underwriting models that banks use are built on consistency, and so when you’re lacking consistency for a number of years, it’s very difficult for large institutions to adapt to that,” Mathews added.

Bobby Morelli and his nine-year-old daughter outside their small business, The Hot Dog Box

Bobby Morelli, owner and co-founder of The Hot Dog Box, a restaurant in Chicago, tried to apply for a loan from the Small Business Administration (SBA) in 2020. But under the SBA process, he was not eligible because he hadn’t been in business for two years before.”

“It was kind of like a punch in the throat,” Morelli told Yahoo Finance in an interview. “I had a little bit of money saved from my years of work and stuff like that. [But] not being able to access funding, the traditional route, I felt was holding back our growth.”

Unable to convince a traditional bank to give him a loan, Morelli, who runs the business with the help of his 10-year-old daughter, sought another source of capital: equity loans.

“It sort of disarms a lot of the bureaucracy that you’ll go through with traditional funding sources, and you’re not tied to those stingy options, if you will,” Morelli said.

Morelli turned to Mainvest, which provided equity loans at low interest rates to restructure its debt.

“At the time, our goal was $20,000, and we hit our goal in 10 days and once you get it, you set your interest payment. I think our interest is around 1.6%,” Morelli explained.

Morelli is not alone. Data from the JPMorgan Chase Business Leaders Outlook 2022 survey shows that small business leaders are increasingly looking for non-traditional ways to achieve their goals.

Nearly half of small businesses plan to use business credit cards to raise capital — up from 38% a year ago — with line of credit financing the second most common method of financing. And 68% of small businesses also plan to explore lending options online, up from 56% a year ago, the survey found.

Data from online lender Biz2Credit, in February large banks approved 14.7% of loan applications – up from 28.3% in the same month in 2020. And smaller banks approved 20.5% of loan applications, against 50.3% the same month in 2020.

According to Molly Day, vice president of public affairs at the National Small Business Association, one way to help struggling business owners is to change lending rules to allow “community credit unions to lend more to businesses.” They are only allowed to lend up to a certain percentage of their total assets to corporations and small businesses. If we could increase that cap, that would be a huge help because credit unions are in the communities, they know these people, you’re going to get more of these character-based loans.”

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv

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