- October 7, 2022
- Posted by: admin
Lending activity dropped significantly among small businesses; five tactics can help entrepreneurs get better rates.
Rising interest rates and uncertain economic conditions are intensifying a slowdown in financing-related activity among small businesses, according to the newest release of the NerdWallet Small-Business Financing Index.
The NerdWallet Small-Business Financing Index evaluates factors such as loan delinquency rates, loan volumes, credit card use and optimism among small-business owners. Based on the most recent available data, from July, the index now sits at a low of 100.6, more than two points below its March 2022 high of 103.2.
The index had been relatively flat over the past few months, indicating that financing-related activity had been holding steady; however, July’s downturn suggests the dam may have burst.
Key indicators slide
Declines in small-business lending and stagnating optimism among small-business owners helped push the index lower, according to underlying data from Equifax, the National Federation of Independent Businesses, and Dun & Bradstreet.
In July, small-business loan volume was at its lowest point since late 2020, according to Equifax.
Data on small-business credit card and loan delinquencies was mixed, with Equifax reporting rising delinquency rates in eight of the 10 largest states and in all six of its tracked industries in July; Dun & Bradstreet, however, reported decreases in payment delinquencies and credit card delinquencies among small businesses.
Optimism measures from the National Federation of Independent Businesses continued to fall, with the trade group reporting that capital spending plans, inventory investment plans, expected real sales and the environment for expanding have all come down.
Lending conditions expected to toughen for small businesses
“We’re in that part of the cycle where credit availability is going to get tighter,” says Tommy Thompson, a certified financial planner at Innovative Financial Group in Alpharetta, Georgia. The fact that a lot of small-business lending is short-term in nature and often involves floating interest rates could make rising interest rates even more challenging for small businesses that need capital, he adds.
“It’s going to cost more to get credit,” he says. “Underwriting standards are going to get tougher because you’re going to actually start seeing delinquencies and defaults, and the banks don’t respond to that by going, ‘Oh, we need to be looser with our money.’ They respond to that with tightening up their underwriting requirements.”
Experts say: Do these 5 things to get better rates from business lenders
A tougher lending environment means business loans will likely come with higher price tags in the coming months, but small-business pros say there are things entrepreneurs can do right now to get lower interest rates on business loans.
1. Have a relationship with the lender
If you don’t have an existing relationship with a lender, now may be a good time to make one. Thompson suggests that connecting with a local banker who has some autonomy in the underwriting process can make all the difference during a tight credit market.
“They know what their underwriters are looking for, and they will do the coaching with the business owner to make sure that the balance sheet looks the way it needs to look,” he says. A local banker might also look at credit reports and payment histories ahead of time to make sure there are no red flags on your application.
2. Consider using collateral
Collateral reduces the lender’s risk, which can mean a better deal for the borrower, according to Kelly Crane, a certified financial planner and senior vice president at Wealth Enhancement Group in St. Helena, California.
From a lender’s perspective, Crane says, “securing the loan just with your business income is riskier than having it secured by an asset like your building or your home. So collateralized loans usually have lower rates.”
3. Get your books up to date
If you want the best terms on a business loan, be sure your business’s accounting statements and tax returns are correct, complete and current, says Armine Alajian, a certified public accountant and founder at the Alajian Group in Los Angeles and New York.
You’ll have to be able to explain to lenders what each line item means on your financial statements and what story that tells. You also should be able to explain how the information on your tax returns ties to the information on your accounting statements, she says. “They ask a lot of questions,” Alajian adds.
4. Keep your personal credit score high
A personal FICO score over 720 is a must-have for getting the best interest rates from small-business lenders, Crane says.
“There’s a wide spectrum of businesses, from the sole proprietor trying to fund his own operation to something slightly bigger than that,” he says. “In the smaller of those business environments, it’s really based completely on the owner’s credit.”
If you need to build your credit, monitoring your FICO score, freezing your credit report to thwart hackers and signing up for account alerts could help, according to Crane.
5. Shop around and compare your options
It’s hard to know if you’re getting the best deal unless you have something to compare it to, Crane notes.
“The only way to validate the rates you’re being charged is to talk to another lender,” Crane says. “If you have the ability to talk to two different banks and go through the process, I’d say do your homework and be willing to spend that time before you need the loan.”
This is the second installment of the NerdWallet Small-Business Financing Index. It tracks and weights data from multiple sources, beginning in December 2021. Future index readings are always relative to the initial entry of 100. For example, an index reading of 110 would indicate that the index has risen by 10% since December 2021. Tracking this data provides a consistent glimpse into the economic context in which small businesses operate.
NerdWallet’s Small-Business Financing Index combines elements of Equifax’s Small Business Lending Index and Dun & Bradstreet’s Small Business Health Index, which capture small-business loan and small-business credit card activity, as well as the National Federation of Independent Business’s Small Business Optimism Index, which measures owner sentiment.
Index values for December through April have been revised to reflect interpretive changes in data collection from a source. You can find the prior values in our previous NerdWallet Small-Business Index.