Small businesses 'holding up pretty well' despite high inflation, tight credit

(TND) — The rough waters of the economy don't appear to be scaring off many would-be small business owners.

That's not to say there aren't challenges. Inflation remains high, labor remains tight, and lending looks harder to secure.

But given the dynamics of this "strange economy," small businesses are "holding up pretty well at this point," said finance professor Brian Blank from Mississippi State University.

Blank and his colleague Brandy Hadley, from Appalachian State University, say there are reasons for optimism even in the wake of another Federal Reserve rate hike and the collapse of several large banks.

Getting a small business loan is hard and apparently getting harder.

The latest Biz2Credit Small Business Lending Index shows loan approvals from both big and small banks fell in March compared to both the prior month and the prior year.

Only 13.8% of small business loans were approved in March from big banks, the lowest approval percentage since July 2021, according to Biz2Credit.

The small bank approval rate was 19.1% in March, while the approval rate from institutional investors actually ticked up to 26.5%.

But Blank said the cost of credit is an even bigger problem.

"The cost of credit has changed in a way that businesses haven't seen in a decade," he said.

The Associated Press talked to one Colorado pharmaceutical company that has seen the interest rate on its line of credit nearly double to about 14% since before the pandemic.

Hadley said the credit crunch seems to be impacting growth opportunities more than day-to-day operations.

When we look at the anecdotes of the challenges of getting funding right now for small businesses, most of the anecdotes that you're reading about are, 'I wasn't able to do something new. I wasn't able to grow the business.' Not so much, 'I wasn't able to maintain operations,'" she said.

There are over 30 million small businesses in America, accounting for nearly half of our private sector workforce.

And folks are still jumping into the small business arena.

The U.S. Chamber of Commerce says there were a record 5.4 million new business applications filed in 2021 and another 5.1 million last year.

Business applications in March of this year saw a 4.5% increase over the previous month, the Census Bureau reports.

"That's a good sign that small businesses are faring well," Blank said of new business starts.

Consumer spending remains strong, and Blank said that’s crucial.

"Consumer spending is two-thirds of the economy, and so any kind of growth there bodes really well for basically everything," he said.

While he said uncertainty remains, Blank thinks some of the biggest challenges may be behind small businesses.

"I think that most of the impact of rates has already been felt," he said. "... Capital got a lot more expensive over the last 12 months. You're not going to see the same type of change over the next 12 months."

"It's possible that it gets a little bit more expensive in the coming months, but nothing like we've seen," he continued.