Traditional Funding Sources Are Drying Up For Small Businesses

Small Business Loan Approval Rates Down More Than 50% Since November 2019

Not only has passage of a second Paycheck Protection Program (PPP2) stalled, but avenues of securing capital from traditional sources of funding also are hard to come by, according to the latest Biz2Credit Small Business Lending Index™.

In fact, small business loan approval percentages at big banks ($10 billion+ in assets) dipped to 13.2% last month, an indication that the challenges for small business owners in need of financing continue. This figure is a more than 50% drop from a year ago.

Even though many companies are operating at a loss right now and need capital, they are discouraged from applying for funding because of the likelihood or rejection as approval rates drop and because there is so much economic uncertainty caused by the coronavirus. Business owners are anxiously awaiting the enactment of PPP2, that would provide forgivable loans to survive the current pandemic surge. Without significant federal assistance, small companies all across the country will struggle to survive. Many of them will fold.

In hard hit New Jersey, a recent study reported that more than 30% of small businesses in that state have closed. This would have seemed inconceivable less than a year ago. My fear is that if a government stimulus package is not enacted, even more businesses will go under before the year concludes.

As the virus seems to be spiking again, local governments are enacting tighter restrictions on the operations of restaurants, gyms, and other businesses. This would put a great strain on businesses that are already not likely to survive much longer without help.

During November, small banks approved 18.3% of business financing applications, down one notch from 18.4% the month before and a figure in sharp contrast with November of 2019 when smaller banks were approving more than half of the funding requests they received. This is a huge drop-off, and with banks being cautious by nature, it does not bode well for businesses that need an infusion of cash to survive.

Meanwhile, credit unions are currently approving 20.7% of borrowers. Last year at this time, credit unions approved about four-of-ten funding requests. Institutional lenders last November granted two-thirds of funding applications; now they are granting less than one-quarter (22.6%). Likewise, alternative lenders are also approving about half as many funding proposals as they did a year ago.

“It is imperative that a PPP2 is passed,” said Sean Flannery, owner of Sheelen’s Crossing Pub & Bistro in Fanwood, New Jersey. “We are limited to 25% indoor capacity and outdoor dining is closing because it’s too cold to eat outside.”

Flannery says his bar-restaurant has cut back the number of its employees and the hours of operation.

“After this, there’s only one thing left to do, that’s to shut until the nicer weather next year,” he said. “If we get PPP money, we can keep our normal hours and maintain staff.”

Already Sheelen’s has reduced its operation from seven days to five days a week. New Jersey mandates that bars shut by 10:00 p.m.

“We are staying open on only during the busiest times,” Flannery said. “I don’t expect a full recovery until 2022… and we need help to get there.”