Credit is tight for small brick-and-mortar businesses, but not for small online businesses

Featured Sponsor

Store	Link	Sample Product
UK Artful Impressions	Premiere Etsy Store

The old adage is that the best time to get credit…is when you don’t need credit.

This is because when a company’s coffers are running low, when cash flow is an issue, and working capital is still a lifeline—that is, the need for credit looms—the would-be borrower looks like a risk of poor credit.

There is evidence that for small businesses and the regional banks they depend on, the tap is being turned, if not to the “off” position, to a point where funding has slowed to a trickle.

The pressure has been evident in the new era of inflation, even before the bank runs that marked the first quarter of this year. as pointed out the Federal Board of Examination of Financial Institutions (FFIEC), in 2021 compared to 2020, the dollar amount of small business loans originated decreased by 21%, to about $371 billion. The Kansas City Fed noted in its own data That year-over-year, small business loans were down 17.7%.

And more recently, as noted here, the current friction on Capitol Hill regarding the debt ceiling shows that 9% of small and medium-sized companies (SMEs) report more problems securing their latest loan than previous attemptsaccording to Bloomberg.

Online merchants have it a little easier

Those are aggregate numbers, but if we start to get more granular, a fork may be forming. For smaller businesses that operate through online channels, there are digital avenues and platforms geared toward e-commerce (and omnichannel commerce) that have tapped into less traditional means of financing.

Consider, as an example, Amazon’s recent small business update, which revealed that in 2022, the e-commerce giant and its third-party lending partners lent $2.1 billion to independent sellers, representing a 50% increase over the previous year. Elsewhere, during earnings season, Shopify said it had extended $477 million in advances and commercial loans in the first quarter of the year. Fourth quarter activity showed merchants borrowed $324 million, up 21% year-over-year.

But the question arises as to what happens to the other major SMEs, the ones that may be seasonal in nature, the ones that are perhaps more pressured by macro forces.

The general pullback in small business lending, as described above, may not bode well for Main Street SMBs.

As detailed in the last quarterly study on the health of Main Street SMEs, he The cash situation is really tricky, with only around a quarter of businesses surveyed saying they have access to more than 60 days of cash. Up to 17% of companies do not have access to any cash cushion.

Half of construction companies say they have access to less than 30 days of cash; about 45% of hospitality companies say the same. These businesses rely on large spending by end-consumers and are seasonal, and certainly traditional, which means operating costs are high as well.

As for where they are receiving the funds? The PYMNTS data reveals that approximately one third of them use personal credit cards; only about 17% obtain funds from banks.