Credit Crunch Hits Small Businesses
As credit becomes increasingly difficult to obtain, small businesses are feeling the pain. With the US economy already suffering from rising interest rates, the collapse of two major banks last month will only increase the tightening of purse-strings, risking recession in the process.
Struggle to Expand and Hire
Small businesses like Piper Whitney Construction and South Florida’s commercial insulation business are struggling to get the finance they need. Lack of funds is hampering them from expanding, hiring, and acquiring the necessary equipment. With the delays in payment, it’s hard for businesses to keep the cash flowing smoothly for expenses such as paying employees.
The Federal Reserve Bank of Dallas in Action
The Federal Reserve Bank of Dallas recently surveyed 71 banks and found a significant downturn in lending. Rising interest rates and the recent bank collapses are expected to make other lenders even stingier. With the collapse of Silicon Valley Bank, businesses such as Alex Cates’ that keep large sums of cash need assurance that their deposits are secure.
A Catch 22 Situation
The banker’s caution can seem excessive to business people such as Cates who have yet to default on any payments. Businesses like Cates’ that have deposit insurance for sums exceeding $250,000 will have received assurances that the money is safe. However, when it comes to renewing lines of credit, his bank’s caution is hampering his business.
Affecting the Broader Economy
Cautious lenders are putting the brakes on the economy at large. The Federal Reserve Bank believes that tougher lending standards work as an extra boost to interest rates, helping to bring down inflation. However, the ripple effects are unpredictable, generating worry for an uncertain future.
Navigating Through Uncertainty
Smaller businesses are also painfully aware of the risks they take by borrowing money in an uncertain economy. They must balance the growing need for credit against the risks of exposing themselves when the business climate takes a turn for the worse.