Economic Pressures Signal Tightening of Small Business Lending Market to Start 2023
According to the Federal Reserve’s Economic Stability Report for November 2022, “A weaker economic outlook, higher interest rates, and elevated uncertainty have contributed to a substantial tightening in financial conditions .” This is likely to translate into a drag on small business lending in 2023.
With this warning from The FED, we will assume the worst-case scenario of a much tighter small business lending landscape for the first quarter and perhaps through the first half of 2023.
Impact on Small Business Lending in 2023
The climate for small business loans has already reacted to the tighter credit markets (rate hikes) as financial institutions have also tightened borrowing requirements for business owners.
This is a result of the shift in lending risk assessments as described in the Financial Stability Report:
“Going forward, we expect that inflation and rising borrowing costs may pose risks to the ability of some businesses and households to service their debts, especially for those holding adjustable-rate products . An economic downturn or a correction in real estate prices would also put pressure on business and household balance sheets.”
According to Robert Kleiber, COO at New York-based iCapital Funding, “We are starting to see some increase in debt service stress, but for now it is only slightly elevated.” But Kleiber also noted that some alternative lenders and financial institutions are already responding by cutting staff and scaling-back lending.
Kleiber says companies that are planning on applying for financing or business loans do so sooner rather than later. “It is likely that traditional banks and financial institutions will streamline lending criteria significantly going forward,” says Kleiber. “In addition, for the first time we are seeing some top alternative lenders curtail funding operations as a risk management measure.”
Economic Fundamentals: Factors that will affect business lending in 2023
In addition to elevated risk and high levels of debt, consumer credit has also accelerated at an astonishing rate from 2021-2022 according to the Federal Reserve’s monthly report on Consumer Credit (also released in November 2022). Revolving debt on credit cards has far exceeded pre-pandemic levels according to the report.
These factors combined with historically high inflationary pressures have prompted the US Government (and other central banks) to make adjustments to monetary policy to try to cool high inflation. The FED has begun raising interest rates (Fed Funds Rate) aggressively, making borrowed capital much more costly for entrepreneurs.
Most economists believe that at least one more rate hike is imminent in the coming year. Higher rates foreshadow an economic downturn in the first quarter and will likely see a consolidation in GDP growth.
Considering that small business owners rely on traditional and non-traditional means of raising capital (i.e.. personal loans), there will be fewer options for small business owners to get loans. According to the Financial Stability Report, in the third quarter of 2022 both businesses and those with good credit are highly leveraged with debt.
The U.S. economy is facing a number of macroeconomic headwinds as we head into next year. The labor markets continue to plague all industries, especially services and hospitality which is stalling economic growth. Real wages are declining as the consumer price index continues to soar, creating a price/wage crisis.
Commercial Real Estate and Housing Market Cooling
While home prices continue to rise, the rate of increase has slowed considerably and the number of home sales has fallen dramatically.
Similarly, commercial real estate price indexes, which have risen to record-high levels have seen price increases slow sharply. Both markets are responding to the increase in interest rates.
Supply Chain Worries Persist
With the ongoing conflict in Ukraine and the widening lockdowns in China due to pandemic resurgence fears, global supply chains remain under pressure. These supply chain issues are contributors to inflationary pressures and worsen economic conditions for small businesses in several ways.
The gridlock in the supply chain raises commodity prices, which strains cash flow for small businesses. This past year has seen commodity prices soar, delivery costs almost double and access to raw materials grind to a trickle. Both ports or origination and destination are still experiencing bottlenecks.
These metrics are likely to worsen with high levels of volatility throughout 2023, especially if U.S. rail companies fail to reach contract resolution.
Continued Volatility in Energy Costs
While commodity prices for crude are settling and gasoline prices are beginning to stabilize, home heating and diesel fuel costs remain very high as providers of these distillates report that they are already at maximum capacity.
The elevated prices of diesel are a significant impediment to growth and price stability as many small business owners have their cash flow impacted by record-high transportation and shipping costs.
How to Navigate Business Lending in 2023
Rob Kleiber says that businesses will have to be more resourceful in 2023. “With many alternative lenders now behaving more like traditional banks when it comes to risk, small businesses need to be more aggressive in applying to more lenders and financing sources.”
Kleiber also advises business owners to “clean-up” their financial situation. He advises companies to streamline operations and cut waste wherever and whenever they can.
Mr. Kelly is an expert in online marketing, search engine optimization, content development and content distribution. He has consulted some of the top brokerages, media companies and financial exchanges on online marketing and content management including: The New York Board of Trade, Chicago Board Options Exchange, International Business Times, Briefing.com, Bloomberg and Bridge Information Systems and 401kTV.
He continues to be a regular market analyst and writer for forextv.com. He holds a Series 3 and Series 34 CFTC registration and formerly was a Commodities Trading Advisor (CTA). Tim is also an expert and specialist in Ichimoku technical analysis. He was also a licensed Property & Casualty; Life, Accident & Health Insurance Producer in New York State.
In addition to writing about the financial markets, Mr. Kelly writes extensively about online marketing and content marketing.
Mr. Kelly attended Boston College where he studied English Literature and Economics, and also attended the University of Siena, Italy where he studied studio art.
Mr. Kelly has been a decades-long community volunteer in his hometown of Long Island where he established the community assistance foundation, Kelly's Heroes. He has also been a coach of Youth Lacrosse for over 10 years. Prior to volunteering in youth sports, Mr. Kelly was involved in the Inner City Scholarship program administered by the Archdiocese of New York.
Before creating ForexTV, Mr, Kelly was Sr. VP Global Marketing for Bridge Information Systems, the world’s second largest financial market data vendor. Prior to Bridge, Mr. Kelly was a team leader of Media at Bloomberg Financial Markets, where he created Bloomberg Personal Magazine with an initial circulation of over 7 million copies monthly.
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