Turned down for a loan, business owners look to family and even crowdsourcing to get money to grow

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NEW YORK (AP) —

Among the many challenges small businesses face these days when trying to grow, getting a loan is near the top.

Large and small banks have revised their credit requirements as of 2015 The Federal Reserve has raised interest rates The last two years. The collapse of three regional banks this spring and the The possibility of strict rules Perhaps it made some banks more cautious.

Therefore, business owners may have to resort to crowdfunding instead of lenders, borrow from family or friends, or simply sacrifice expansion plans backed by more capital.

According to the Federal Reserve’s quarterly survey of top bank lending executives, 49 percent of banks tightened lending standards for small companies — those with annual sales of less than $50 million — in the July-September quarter, up from 22 percent. same period last year. Loan officers cited an increasingly uncertain economic outlook as one reason for the narrowing.

Biz2Credit data tells a similar story. In June 2022, large banks approved 15.4% of small business loan applications. It has been declining every month since and was 13 percent in October. At smaller banks, one in five loan requests were approved — a far cry from the 50% approved pre-pandemic.

Meanwhile, interest rates have jumped. The average interest rate paid on short-term loans was 9.1 percent in October, up from 6.7 percent in the same period a year ago, and up from 4.9 percent a year earlier.

If you’re a small business looking for a loan, all those factors come into play.

Cheyenne Smith in Salt Lake City, Utah, founded Dakota Ridge in 2021, which makes cowboy rain boots for children, with savings from a previous corporate job and about $80,000 borrowed from her 401(k) retirement plan.

Smith quickly realized that she would need more money than she originally thought to build her inventory. But she didn’t qualify for many small business loans without two years of tax returns. Online lenders were quick to offer their services, but the terms were very strict, requiring weekly payments or interest rates as high as 40%. Online lenders approve more loans than traditional banks, but often at higher interest rates.

“It was a nightmare to try and get the money,” she said. With no other option, she borrowed about $30,000 from her mother by the end of 2022.

“A lot of people don’t get that opportunity,” she said. “And I’m very fortunate, and I know the opportunity to have that opportunity to have family members who are willing to invest, not just the money up front with the 401(k) money.”

High interest rates have become unbearable for Chantel Chambis. She is the owner of a nonprofit consulting firm in Richmond, Va., that works with nonprofit and faith-based organizations to grow their businesses.

She started her business in 2017 and grew it without funding. In May, Chambis announced an expansion plan for her business that required hiring more people and investing in technology. She realized that she needed a loan to fulfill her plan.

Her goal was to get a $25,000 loan. The bank denied her Capital One loan but gave her a small increase on her credit card with a $3,000 loan. “Not enough,” she said. The private bank also refused.

Chambis tried to go the non-traditional route and was approved for an additional loan of $11,500 by an online lender, but the interest rate was so high it didn’t make sense, she said. The lowest rate she quoted was 27 percent.

“It’s not just intimidating to small business, it’s impossible,” she said.

For now, she’s on hold with the expansion plan. She is planning to raise more money in January, calling it “the only logical next step.”

“We will continue to work, but right now it feels like a hamster in a wheel,” she said. “And I don’t think anyone is coming to save us.

Some small businesses are stopping projects because of the environment. Nate Hodge co-founded Raaka Chocolate in 2010 seeking funding from long-term investors. It relies on capital investments since.

But after the pandemic, Hodge and his partner started looking for money from banks and online lenders instead of their investors to make some improvements. He panicked around the lender. He was seeing 19%-plus interest rates from online lenders.

Instead, he turned to his investors for personal loans. Still, the loans aren’t enough for some of the renovation plans they had for the warehouse space, including flooring and removing some walls.

“We had to stop that because we couldn’t get good financing,” he said. “It’s definitely disappointing. The way some of these (online) lenders offer loans to small businesses seems predatory.

During the pandemic, Jane Rose started her Bee Caps business, selling small garden containers that hold water for pollinators out of her garage in Dallas, Texas.

She got a loan, but it was a struggle — and she saw first-hand the effects of rising rates. When she applied for a $350,000 loan to buy a warehouse after finishing her garage, she was turned down by two banks even though she had enough cash for a down payment.

In the year She sought recommendations for other banks to try, with a deal with a 3.8% interest rate through the end of 2021, and was successful at Comerica Bank.

In August, she closed on a second mortgage with Comerica for about $400,000. But this time, credit rates have increased and interest rates have nearly doubled to 7 percent.

Still, Rose said she felt like she didn’t have much choice in taking out the loan, especially since the amount is still below average.

“If I could have waited a little longer, I would have,” she said. “(But) the position came up and I kind of needed to grab it if it was ever going to happen.”



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