Banks are spooked and getting stingy about loans — and small businesses are suffering

Liz Southers runs a commercial insulation company in South Florida. She says the company could grow faster if it had access to more credit. (SouthCo Insulation)

Weeks after the collapse of two big banks, small business owners are feeling the pinch.

Bank lending has dropped sharply since the failures of Silicon Valley and Signature Banks. That not only hits businesses. It also threatens a further slowdown in economic growth while raising the risk of recession.

Credit, after all, is the grease that helps keep the wheels of the economy spinning. When credit gets harder to come by, businesses start to squeak.

Take Kryson Bratton, owner of Piper Whitney Construction in Houston.

“Everybody is, I think, very gun-shy,” Bratton says. “We’ve got the R-word — recession — floating around and sometimes it feels like the purse strings get tighter.”

Bratton has been trying to get financing for a Bobcat tractor and an IMER mixing machine to expand her business installing driveways and soft playground surfaces.

But banks have been reluctant to lend her money.

“It’s not just me,” she says. “Other small businesses are struggling with the same thing. They can’t get the funds to grow, to hire, to buy the equipment that they need.”

Missed opportunities

Tight-fisted lenders are also weighing on Liz Southers, who runs a commercial insulation business in South Florida.

Her husband and his brother do most of the installing, while she handles marketing and business development.

“There’s no shortage of work,” Southers says. “The construction industry is not slowing down. If we could just get out there a little more and hire more people, we would just have so much more opportunity.”

Liz Southers and her husband, James Southers, at their business in Florida. Liz Southers says her business would take more assignments, but finding credit is proving difficult. (SouthCo Insulation)

Southers says it often takes a month or longer to get paid for a job, while she has to pay her employees every week. If she had a line of credit to cover that gap, she could hire more people and take on more work. But while her bank has been encouraging, she hasn’t been able to secure any financing.

“They’re like, ‘Your numbers are incredible.'” Southers says. “But they’re like, ‘You guys are still pretty new and we’re very risk averse.'”

Caution overkill?

Even before the two banks failed last month, it was already more costly to borrow money as a result of the Federal Reserve’s aggressive interest rate hikes.

Other lenders are now getting even stingier, spooked by the bank runs that brought down Silicon Valley Bank and Signature Bank.

The Federal Reserve Bank of Dallas surveyed 71 banks late last month, and found a significant drop in lending. Weekly loan data gathered by the Federal Reserve also shows a sharp pullback in credit.

Alex Cates has a business account and a line of credit with a bank in Huntington Beach, Calif.

“We’ve got a great relationship with our bank,” Cates says. “Randy is our banker.”

Cates decided to check in with Randy after the collapse of Silicon Valley Bank to make sure the money he keeps on deposit — up to $3 million to cover payroll for 85 employees — is secure.

People line up outside of a Silicon Valley Bank office in Santa Clara, Calif., on March 13, 2023. in Santa Clara, California. Depositors lined up to retrieve their money even after after regulators rescued the tech-focused lender. (Justin Sullivan/Getty Images)

Randy assured him the money is safe, but added Cates was lucky he renewed his line of credit last fall. If he were trying to renew it in today’s, more conservative climate, Randy warned he might be denied.

“Just because you’re only a 2-and-a-half-year-old, almost 3-year-old business that presents a risk,” Cates says.

As a depositor, Cates is grateful that the bank is extra careful with his money. But as a businessperson who depends on credit, that banker’s caution seems like overkill.

“It’s a Catch-22,” he says. “I’ve got $3 million in deposits and you’re telling me my credit’s no good? We’ve never missed a payment. They have complete transparency into what we spend our money on. But now all of a sudden, we could have been looked at as an untenable risk.”

The broader impact is hard to predict

As banks cut back on loans, it acts like a brake on the broader economy. That could help the Federal Reserve in its effort to bring down inflation. But the ripple effects are hard to predict.

“You want the economy to cool. You want inflation to come back towards the 2% target. But this is a profoundly disorderly way to do it,” says Joe Brusuelas, chief economist at RSM.

And lenders aren’t the only ones who are getting nervous. Bratton, the Houston contractor, has her own concerns about borrowing money in an uncertain economy.

“Even though I would love to have an extended line of credit, I also have to look at my books and say how much can I stomach sticking my neck out,” she says. “I don’t want to be stuck holding a bag if things flip on a dime.”

Copyright 2023 NPR. To see more, visit https://www.npr.org.

Transcript :

AYESHA RASCOE, HOST:

Credit is the grease that keeps the wheels of the economy spinning. And as credit gets harder to come by, some businesses are starting to squeak. NPR’s Scott Horsley reports what the credit crunch, which started even before the collapse of two large banks last month, could mean for the economy as a whole.

SCOTT HORSLEY, BYLINE: Liz Southers runs a commercial insulation business in South Florida. Her husband and his brother do most of the installing. She handles marketing and business development.

LIZ SOUTHERS: There is no shortage of work. The construction industry is not slowing down. If we could just get out there a little more and hire more people, we would just have so much more opportunity.

HORSLEY: But Southers says it often takes a month or more to get paid for a job, while she has to pay her employees every week. She’d like to get a line of credit to cover that gap so she could hire more people and grow the business. But while her bank’s been encouraging, they haven’t put up any money.

SOUTHERS: They’re like, your numbers are incredible. But they’re like, you guys are still pretty new, and we’re very risk-averse.

HORSLEY: Kryson Bratton knows that frustration. She runs a business in Houston that turns recycled materials into driveways, parking lots and those squishy soft surfaces you now find under a lot of playgrounds. Right now, she’s got more work than she can handle.

KRYSON BRATTON: I’m currently telling customers, I can’t touch your job until September. And these are contracted jobs that they’re waiting for me.

HORSLEY: Bratton could move faster and take on more work if she had a Bobcat tractor to handle excavation and a larger machine for mixing materials. But even though she has a nine-year track record, banks are wary about extending additional credit.

BRATTON: Everybody, I think, is very gun-shy. I mean, we’ve got the R-word, recession, floating around. And, sometimes, it feels like the purse strings get tighter. And it’s not just me. Other small businesses are struggling with the same thing. They can’t get the funds to grow, to hire, to buy the equipment that they need.

HORSLEY: The Federal Reserve Bank of Dallas surveyed 71 banks late last month and found a significant drop in lending. It already costs more to borrow money as a result of rising interest rates. And now lenders are expected to get even stingier. After the collapse of Silicon Valley Bank last month, Alex Cates called the bank in Huntington Beach, Calif., where he keeps his business account and has a line of credit.

ALEX CATES: We’ve got a great relationship with our bank. Randy’s our banker. I was just checking in.

HORSLEY: Cates runs a consulting business with 85 employees, so he often keeps 2 or $3 million in the bank to cover payroll, well over the limit that’s ordinarily insured. Cates says Randy assured him that his money is safe and stressed the bank is very conservative.

CATES: Through that conversation, he said, just FYI, not that, you know, we think any differently about your business, Alex. Had the banking situation happened in December, for example, I don’t know that we could have gotten your line of credit renewed just because you’re only a 2 1/2, almost 3-year-old business, and, you know, that presents a risk.

HORSLEY: And there’s the double-edged sword. As a depositor, Cates is grateful that the bank is extra careful with his money. But as a business that depends on credit, that banker’s caution can seem like overkill.

CATES: It’s a catch-22. You know, we have 3 million in deposits, and you’re telling me my credit’s no good. We’ve never missed a payment. They have complete transparency into what we spend our money on. But now all of a sudden, we could have been looked at as a untenable risk.

HORSLEY: And as banks across the country get more cautious, that acts like a brake on the broader economy. That’s not all bad. It might help to bring down inflation. The Fed thinks tighter lending standards could work sort of like an extra boost in interest rates. But Joe Brusuelas, who’s chief economist at the consulting firm RSM, says the ripple effects are hard to predict.

JOE BRUSUELAS: You want the economy to cool. You want inflation to come back towards the 2% target. But this is a profoundly disorderly way to do it.

HORSLEY: And lenders aren’t the only ones who are getting nervous. Bratton, the Houston contractor with all those driveways and playgrounds to install, has her own concerns about which way the economy is headed.

BRATTON: Even though I would love to have an extended line of credit, I also have to look at my books and sit there and say, how much can I stomach sticking my neck out? Because I don’t want to be stuck holding a bag if things flip on a dime.

HORSLEY: Often the availability of credit is closely tied up with confidence. When credit dries up, even risk-taking businesspeople may find their confidence shaken. Scott Horsley, NPR News, Washington.

(SOUNDBITE OF MUSIC) Transcript provided by NPR, Copyright NPR.

NPR News

KTOO is the NPR member station in Juneau. NPR offers its members radio and digital stories.

Sign up for The Signal

Top Alaska stories delivered to your inbox every week

Site notifications
Update notification options
Subscribe to notifications