Banks sneeze

Banks are the lifeblood of small business lending and therefore small business growth. In NYC alone, 92% of small business lending is driven by non-SBA bank-led bank lending

But bank lending is drying up. 

Even before the unfolding bank crisis spurred by the collapse of Silicon Valley Bank (SVB), banks were tightening their small business lending. Anxiety about a looming recession, geopolitical uncertainty, and concern about increased market volatility curbed lending at many go-to banks for small businesses.  

Shortly before SVB’s official collapse, JPMorgan Global Wealth Management Chief Investment Strategist Tom Kennedy shared on Yahoo! Finance, “Capital is being removed from the system. Banks are tightening their lending standards at really the fastest rates since COVID and it should imply capital investment should go down as well.”  

With continued bank failures, including First Republic this week, we expect the tightening of small business lending to accelerate. As Investment Bank Jefferies notes, “ … a credit crisis will be upon us soon. This is not going to be the sort of Wall Street credit crisis that we have seen in the past, with waves of corporate defaults and IG downgrades. Instead, this looks more like a Main Street credit crisis where small businesses will soon find their access to credit restrained. The regional banks that have fueled the small business boom that has been ongoing since the pandemic will be far more limited in their ability and willingness to lend, irrespective of their deposit stability or access to liquidity from the Fed.”

At Next Street, through our direct work with underserved business owners, we’ve seen that access to affordable and patient capital has become progressively more difficult over the past year and continuing into the near future. Most of our clients rely on CDFIs to keep their business afloat, but with rising interest rates and tightening of underwriting criteria, it’s more challenging to find funding. Our clients are seeking grants and easy to obtain government backed loans.

“Small Businesses have more of a need for capital, as many of them are still recovering from the giant shock that was COVID,” said Carlos Sugranes, Senior Manager and Small Business Center Director at Next Street. “With tightening lending standards and less access to capital, it will force these businesses to halt investment, slow hiring, and ultimately close their doors.” 

Small businesses catch a cold

Ensuring small businesses have access to the capital and resources they need to survive and thrive is imperative. Small businesses remain the bedrock of our economy, accounting for 66% of jobs added in the past 25 years. Small business households have five times higher median net worth, and a whopping 68% of money generated by local small businesses stay within the local community through resident employment

The accelerating tightening of small business credit at banks should alarm people and be a call to action. The last time we saw this rapid tightening of lending to small businesses was during the onset of COVID-19. And we all know how that turned out for small businesses, consumers, communities and corporations. The pandemic wreaked havoc on consumers dependent on small businesses for goods and services, hurt local communities that rely on jobs and money generated by small businesses, and disrupted big businesses and organizations that count on small businesses as suppliers and customers. 

The lack of affordable and patient capital from banks that would have allowed many small businesses to stay afloat, especially during the early quarantine days, was not available. As a result, in the first year of the pandemic alone, there were roughly 200,000 U.S. establishment permanent closures above historical levels. 

BIPOC small businesses get the flu

Though the stakes are different for small businesses than they were during the early days of the pandemic, there are new challenges. In 2023, there’s a triple threat (inflation, recession, and looming credit crisis) which will likely have a devastating impact on small businesses. In particular it could really crush some of the fastest growing segments of small business growth, including underserved black- and brown-owned small businesses. 

The share of BIPOC–owned businesses is growing rapidly. Black business ownership, for example, increased by nearly 30% post-pandemic, compared to pre-pandemic levels, fueling small business gains. Black business owners reported a 23% increase in annual revenue – twice as fast as overall U.S. employer businesses and added employees at double the rate. Yet rising interest rate expenses, the high cost of goods due to inflation, a stubbornly tight labor market, and steep rents disproportionately and adversely impact black-owned businesses, especially those that don’t have established safety nets. The likely outflow of deposits from regional and small banks will likely exacerbate this situation. For underserved small businesses, including black- and brown-owned businesses that were already approved for financing at a fraction of the rate of white male small business owners, this is untenable.

Next Street’s small business elixirs for banks 

At Next Street, we’re committed to reducing the aches and pains that small businesses, particularly black and brown-owned small businesses, might feel as a result of lending drying up. Here are six ways banks can help small businesses during these uncertain and trying times while reducing their risk exposure. 

  1. Be intentional about supporting black- and brown-owned small businesses: Follow through on previously stated commitments. 90% of the $340 billion committed to racial equity and social justice between May 2020 and October 2022 came from financial institutions. Yet, much of that money is still to be deployed. Now is the time to put this publicly promised money to work. 
  2. Make the most of CRA and philanthropic dollars: Provide operating grants to CDFIs that are lending to underserved small businesses. Don’t just invest in the same old, same old. Use upcoming CRA changes to refresh and revitalize your CRA support and make it work harder for underserved small businesses.
  3. Support small business ecosystems within your communities: Standalone investments only go so far. Ensure all committed small business community dollars go towards building an interwoven small businesses community to expand impact. (See how Cook County leverages a robust network of 40+ community partners to provide small business advising services, outreach and engagement services, and grant application support)
  4. Build alternative financing products to bridge lending gaps – revenue-based financing is a great start and can provide more patient flexible capital for those who don’t fit into a traditional credit box. 
  5. Strengthen diverse supplier programs – through enhanced resources for small business suppliers.  
  6. Create programs that are focused on black and brown businesses owners. Integrate high quality, representative technical assistance into small business touchpoints (e.g., onboarding, credit application process). Make technical assistance relatable and actionable and ultimately more impactful.  

In summary  

Small businesses are the foundation of the US economy. Underserved business owners, particularly black and brown business owners are, in large part, the future of small business in America. Even in a restrained credit environment, banks can play an important role in supporting small businesses and fueling small business growth. By intentionally investing in small businesses of color and by doing things differently, banks can further strengthen our economy. Banks can bring communities together to work more efficiently, productize more patient and flexible capital, provide diverse suppliers with the resources they need, and create more effective CRA programs to increase impact. Those banks who take these steps will come out as small business winners and will be heroes to consumers and businesses alike.

As we celebrate Small Business Week let’s recommit to our small businesses.