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Small businesses seek to avoid possible credit crunch as Federal Reserve prepares to raise rates once more
Concerns about a decline in lending to small businesses are growing as the Fed is expected to raise rates for the 10th time in a little over a year.
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Small businesses – the heartbeat of the U.S. economy – are beginning to feel the pinch of tighter credit conditions as the Federal Reserve continues to increase borrowing costs.
A flurry of headlines in recent weeks has suggested a credit crunch – meaning the availability of lending gets scarcer – is already happening.
That’s in large part brought on by the actions of the Federal Reserve, which has been raising borrowing costs for companies and consumers for over a year in an effort to tame inflation and is poised to raise rates by another quarter point on May 3, 2023. Concerns about the availability of credit have also risen as a result of a spate of bank failures, including that of First Republic on May 1.
A decline in the availability of loans and other financing poses problems for all types of companies. But this can be particularly detrimental to small businesses, which have limited resources to sustain their growth and rely heavily on regional bank financing, currently the most stressed pocket of lending.
Small but mighty
Despite their size, small businesses – typically defined as a company with under 500 employees – are a very important part of the U.S. economy.
Almost all of them, however, employ fewer than 20. And yet collectively they account for half of all private sector workers and 44% of private sector output.
And virtually all for-profit companies are considered small businesses.
Small businesses don’t borrow a lot of money, with the average size of their debt just US$195,000. Altogether it really adds up. At the end of 2022, small businesses owed nearly $18 trillion in debt.
About 70% of small businesses have at least some outstanding debt, which they use to help cover basic operating expenses like wages, rent and inventory, as well as to invest in new equipment and the like. The second most common source of capital, after individual savings, to start a business is loans from a bank, so the ability to access capital is crucial for businesses – a lack of financing is often cited as the primary reason for failure.
While large companies have a range of financing options at their disposal, such as raising capital by selling stock or issuing convertible bonds, small businesses generally rely on bank loans for over 90% of their financing.
Consequently, if bank lending becomes harder to come by, they may need to cut spending or seek alternative sources of more expensive capital to continue investing and expanding. This could have implications for employment and commercial real estate, leading to further slowdowns in growth.
The last time small businesses faced similar financing challenges was during the 2008 financial crisis, when 1.8 million small businesses failed.
Signs of credit tightening
Whether or not the current banking turmoil is creating a serious credit crunch for small businesses remains an open question.
The stories warning of a crunch point to a variety of statistics. For example, the money supply is shrinking at the fastest pace since 1960. Bank lending fell in March by the most since the Fed began compiling the data in 1975. And the share of U.S. banks that say they’re tightening credit standards versus loosening them is at a level that has preceded the last few recessions.
But the money supply was already very elevated, commercial bank lending has recovered somewhat since March, and this is the first time in decades that credit has tightened as a result of rate increases, which is different than other recent recessions. In those cases, credit tightening may very well have been the consequence of the downturn, as opposed to the cause.
In addition, a monthly survey on small business economic trends conducted by the National Federation of Independent Business, a lobbying group, found that overall optimism remained high in March, the latest data available.
Yet, the survey did find that more business owners reported that it was harder to get a loan than in the past. Banks continue to tighten their lending standards to levels approaching those seen during the pandemic as policymakers consider stricter regulations to prevent the bank crisis from spreading.
This tightening of credit could lead to decreased capital expenditures and slower payroll growth in the future. These challenges for small businesses may ultimately end up causing the economy to decelerate further after a sluggish first quarter.
When companies have limited cash during a potential downturn, bankruptcy and company failures can occur, which is almost what happened in March, when Silicon Valley Bank was on the brink of causing many companies to lose the deposits they needed to make payroll.
Room for optimism
On the bright side, companies have been bracing for reduced access to credit since at least March 2022 when the Fed began raising rates.
What’s more, they’ve been anticipating that higher rates could drive the U.S. into recession. That means they should have had plenty of time to prepare to weather most potential storms.
In addition, strong consumer spending, overall healthy bank balance sheets, steady growth in new business creation and a regulatory response that aims to ensure credit doesn’t dry up too much could help avert a credit crisis for small businesses.
But with a fourth bank failing and lingering uncertainty as to whether the quarter-point hike expected on May 3 will be the Fed’s last, we believe small businesses – and the U.S. economy – aren’t out of the woods quite yet.
Still, with the number of new business applications growing, we anticipate more businesses next year than the U.S. has today, and that may be welcome news for an economy trudging through a challenging environment.
The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.
recession bankruptcy pandemic bonds fed federal reserve real estate consumer spending
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One city held a mass passport-getting event
A New Orleans congressman organized a way for people to apply for their passports en masse.
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While the number of Americans who do not have a passport has dropped steadily from more than 80% in 1990 to just over 50% now, a lack of knowledge around passport requirements still keeps a significant portion of the population away from international travel.
Over the four years that passed since the start of covid-19, passport offices have also been dealing with significant backlog due to the high numbers of people who were looking to get a passport post-pandemic.
Related: Here is why it is (still) taking forever to get a passport
To deal with these concurrent issues, the U.S. State Department recently held a mass passport-getting event in the city of New Orleans. Called the "Passport Acceptance Event," the gathering was held at a local auditorium and invited residents of Louisiana’s 2nd Congressional District to complete a passport application on-site with the help of staff and government workers.
'Come apply for your passport, no appointment is required'
"Hey #LA02," Rep. Troy A. Carter Sr. (D-LA), whose office co-hosted the event alongside the city of New Orleans, wrote to his followers on Instagram (META) . "My office is providing passport services at our #PassportAcceptance event. Come apply for your passport, no appointment is required."
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The event was held on March 14 from 10 a.m. to 1 p.m. While it was designed for those who are already eligible for U.S. citizenship rather than as a way to help non-citizens with immigration questions, it helped those completing the application for the first time fill out forms and make sure they have the photographs and identity documents they need. The passport offices in New Orleans where one would normally have to bring already-completed forms have also been dealing with lines and would require one to book spots weeks in advance.
These are the countries with the highest-ranking passports in 2024
According to Carter Sr.'s communications team, those who submitted their passport application at the event also received expedited processing of two to three weeks (according to the State Department's website, times for regular processing are currently six to eight weeks).
While Carter Sr.'s office has not released the numbers of people who applied for a passport on March 14, photos from the event show that many took advantage of the opportunity to apply for a passport in a group setting and get expedited processing.
Every couple of months, a new ranking agency puts together a list of the most and least powerful passports in the world based on factors such as visa-free travel and opportunities for cross-border business.
In January, global citizenship and financial advisory firm Arton Capital identified United Arab Emirates as having the most powerful passport in 2024. While the United States topped the list of one such ranking in 2014, worsening relations with a number of countries as well as stricter immigration rules even as other countries have taken strides to create opportunities for investors and digital nomads caused the American passport to slip in recent years.
A UAE passport grants holders visa-free or visa-on-arrival access to 180 of the world’s 198 countries (this calculation includes disputed territories such as Kosovo and Western Sahara) while Americans currently have the same access to 151 countries.
stocks pandemic covid-19 grantsUncategorized
Fast-food chain closes restaurants after Chapter 11 bankruptcy
Several major fast-food chains recently have struggled to keep restaurants open.
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Competition in the fast-food space has been brutal as operators deal with inflation, consumers who are worried about the economy and their jobs and, in recent months, the falling cost of eating at home.
Add in that many fast-food chains took on more debt during the covid pandemic and that labor costs are rising, and you have a perfect storm of problems.
It's a situation where Restaurant Brands International (QSR) has suffered as much as any company.
Related: Wendy's menu drops a fan favorite item, adds something new
Three major Burger King franchise operators filed for bankruptcy in 2023, and the chain saw hundreds of stores close. It also saw multiple Popeyes franchisees move into bankruptcy, with dozens of locations closing.
RBI also stepped in and purchased one of its key franchisees.
"Carrols is the largest Burger King franchisee in the United States today, operating 1,022 Burger King restaurants in 23 states that generated approximately $1.8 billion of system sales during the 12 months ended Sept. 30, 2023," RBI said in a news release. Carrols also owns and operates 60 Popeyes restaurants in six states."
The multichain company made the move after two of its large franchisees, Premier Kings and Meridian, saw multiple locations not purchased when they reached auction after Chapter 11 bankruptcy filings. In that case, RBI bought select locations but allowed others to close.
Image source: Chen Jianli/Xinhua via Getty
Another fast-food chain faces bankruptcy problems
Bojangles may not be as big a name as Burger King or Popeye's, but it's a popular chain with more than 800 restaurants in eight states.
"Bojangles is a Carolina-born restaurant chain specializing in craveable Southern chicken, biscuits and tea made fresh daily from real recipes, and with a friendly smile," the chain says on its website. "Founded in 1977 as a single location in Charlotte, our beloved brand continues to grow nationwide."
Like RBI, Bojangles uses a franchise model, which makes it dependent on the financial health of its operators. The company ultimately saw all its Maryland locations close due to the financial situation of one of its franchisees.
Unlike. RBI, Bojangles is not public — it was taken private by Durational Capital Management LP and Jordan Co. in 2018 — which means the company does not disclose its financial information to the public.
That makes it hard to know whether overall softness for the brand contributed to the chain seeing its five Maryland locations after a Chapter 11 bankruptcy filing.
Bojangles has a messy bankruptcy situation
Even though the locations still appear on the Bojangles website, they have been shuttered since late 2023. The locations were operated by Salim Kakakhail and Yavir Akbar Durranni. The partners operated under a variety of LLCs, including ABS Network, according to local news channel WUSA9.
The station reported that the owners face a state investigation over complaints of wage theft and fraudulent W2s. In November Durranni and ABS Network filed for bankruptcy in New Jersey, WUSA9 reported.
"Not only do former employees say these men owe them money, WUSA9 learned the former owners owe the state, too, and have over $69,000 in back property taxes."
Former employees also say that the restaurant would regularly purchase fried chicken from Popeyes and Safeway when it ran out in their stores, the station reported.
Bojangles sent the station a comment on the situation.
"The franchisee is no longer in the Bojangles system," the company said. "However, it is important to note in your coverage that franchisees are independent business owners who are licensed to operate a brand but have autonomy over many aspects of their business, including hiring employees and payroll responsibilities."
Kakakhail and Durranni did not respond to multiple requests for comment from WUSA9.
bankruptcy pandemicUncategorized
Industrial Production Increased 0.1% in February
From the Fed: Industrial Production and Capacity Utilization
Industrial production edged up 0.1 percent in February after declining 0.5 percent in January. In February, the output of manufacturing rose 0.8 percent and the index for mining climbed 2.2 p…
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Industrial production edged up 0.1 percent in February after declining 0.5 percent in January. In February, the output of manufacturing rose 0.8 percent and the index for mining climbed 2.2 percent. Both gains partly reflected recoveries from weather-related declines in January. The index for utilities fell 7.5 percent in February because of warmer-than-typical temperatures. At 102.3 percent of its 2017 average, total industrial production in February was 0.2 percent below its year-earlier level. Capacity utilization for the industrial sector remained at 78.3 percent in February, a rate that is 1.3 percentage points below its long-run (1972–2023) average.Click on graph for larger image.
emphasis added
This graph shows Capacity Utilization. This series is up from the record low set in April 2020, and above the level in February 2020 (pre-pandemic).
Capacity utilization at 78.3% is 1.3% below the average from 1972 to 2022. This was below consensus expectations.
Note: y-axis doesn't start at zero to better show the change.
The second graph shows industrial production since 1967.Industrial production increased to 102.3. This is above the pre-pandemic level.
Industrial production was above consensus expectations.
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