“With small business owners’ views about future sales growth and business conditions dismal,” said NFIB Chief Economist Bill Dunkelberg recently, some small business owners “want to hire and make money now from solid consumer spending.” Indeed, U.S. retail sales rose 0.7% in July, beating expectations, suggesting continued consumer resilience.
However, small businesses looking for near-term capital to fund growth must wonder where to get it.
The Employee Retention Credit, a pandemic tax incentive that offers credits of up to $26,000 per retained employee for qualifying wages, has been used as a source of capital by small businesses affected by the pandemic. To file a claim for 2020, a company must do so by April 2024. Claims for 2021 are due a year later. The ERC program, unfortunately, has been plagued by fraudsters offering small businesses “easy money.”
Otherwise, small businesses seeking capital don’t have many choices that aren’t prohibitively expensive.
An option is a group like Newity, which offers access to working capital loans through the Small Business Administration’s 7(a) program. Newity’s niche is loans of $250,000 and under, too small for a bank, and rates run at prime plus 275 basis points, or currently about 11%, said Luke LaHaie, co-founder and co-CEO of the firm.
(In the current government fiscal year, SBA lenders — many of them banks — have approved more than 46,000 loans totaling about $22 billion.)
Newity saw an uptick in loan applications in May, and the numbers have stayed consistent over the summer, LaHaie told CFO. “A huge universe of small business owners is looking for credit, and about 20% of those people qualify,” said LaHaie. Newity refers businesses that don’t qualify to other providers of capital.
For the 7(a) loans, used for working capital, personal and business credit scores and number of years in business drive the underwriting. (Newity looks for businesses at least three years old.)
An SBA loan — a portion of which is guaranteed by the federal government — has a 10-year term and is fully amortizing, said LaHaie, making it “more stable capital” with low repayments.
In comparison, many small business applicants come to Newity laden with high-interest debt — like a merchant cash advance loan – that has a rate of 20% to 30% or more, LaHaie said.
He said the small businesses borrowing through Newity have proven resilient, having made it through the pandemic. “Revenues are still pretty strong,” LaHaie said.
Borrowing from a bank is out of the question for many small businesses. They wouldn’t qualify for a bank loan in the best of times, and now is not the best of times.
Large and regional banks are tightening business loan terms, and they are getting pressured by federal regulatory agencies about their balance sheets in the wake of the Silicon Valley Bank collapse.
The head of the Federal Deposit Insurance Corporation has floated the idea of requiring institutions with more than $100 billion in assets to fund themselves using more long-term debt. Another proposed regulatory change would tie unrealized securities losses to how much capital a bank must maintain.
"Instead of aggressively aiming for growth [in the second quarter], some community banks chose to focus on their best borrowers and on depositors that stick with them.”
S&P Global Market Intelligence
Moody’s put a slew of regional and larger U.S. banks on review for potential downgrade and attached a negative outlook to others last week, noting rising asset risks, higher funding costs, and a curbing of loan growth. Slowing lending “preserves capital but also slows the shift in their loan mix toward higher-yielding assets,” Moody’s said.
Fitch Ratings downgraded the U.S. banking industry in June. On Tuesday, a Fitch analyst said another one-notch industry downgrade could result in negative rating actions for more than 70 U.S. banks.
Community banks, too, are having their problems. A S&P Global Market Intelligence report found the return on assets was generally worse for community banks in many national regions in the second quarter. “Community banks with less than $10 billion in assets posted weaker median results on a year-over-year basis in most operating metrics,” stated S&P.
In a challenging operating environment, “some community banks have put more of a premium on earnings. ... Instead of aggressively aiming for growth [in the second quarter], some community banks chose to focus on their best borrowers and on depositors that stick with them,” said S&P Global Market Intelligence.
Signs of Slowing?
Many businesses responding to the July National Federation of Independent Business (NFIB) survey were uninterested in a loan — more than 60% indicated as such.
A somewhat pessimistic economic outlook is partly the reason. The NFIB’s July survey found the number of small business owners expecting better business conditions over the next six months improved 10 points from June. However, the percentage not expecting better conditions exceeded the optimistic group by 30 percentage points. The net percent of owners who expected real sales to be higher improved two points from June, but was still negative, at -12%.
In addition, robust hiring at small businesses may be starting to slow. According to Bank of America’s internal data, small business payroll payments per client were up 2% year-over-year in June, a slight moderation from 3% growth the prior month. Payments have been on a downward trend since early 2022.
“Nearly every industry exhibited some weakness in payroll, which makes us wonder about corrective measures from possible over-hiring in search of skilled workers earlier this year."
Chief Investment Officer, CBIZ
Payroll spending was weakest in finance, insurance, and real estate in June, “reflecting early signs of [labor market softness] in higher-income industries,” according to a BofA Institute report.
The CBIZ Small Business Employment Index, released August 8, showed a seasonally adjusted decrease for hiring in July for the more than 3,200 companies with 300 or fewer employees it tracks.
“Nearly every industry exhibited some weakness in payroll, which makes us wonder about corrective measures from possible over-hiring in search of skilled workers earlier this year,” said Anna Rathbun, Chief Investment Officer at CBIZ investment advisory services.