Small Business Credit Crunch is Coming Soon

by | Mar 20, 2023 | Business Finance, Business Strategy, Resources, Small Business | 0 comments

Banking failures will lead to tighter regulations on banks–and less money available for small business lending and credit.

The recent multiple banking failures have been blamed on a myriad of factors, policies and people. 

But no matter who gets blamed, banks simply didn’t have enough cash reserves to cover the liquidity requirements of depositors.

What that means in general, bank regulations will get tougher. Specifically, banks will be required to replenish cash reserves to cover liquidity requirements of their customers. In fact, some industry experts speculate reserve requirements will become more stringent for all banks.

Small Business Funding and Bank Failures

For small businesses, higher cash reserve requirements will have two major impacts; increased difficulty obtaining funding and higher costs of capital.

Banks will now need to hoard cash to build reserves. Lending to small businesses will not be on the list of priorities for traditional banks. If you do obtain funding, you’ll most likely get less money than you want or need.

Making a bad situation even worse, borrowing less money will cost you more as interest rates will continue to rise.

Small Business = Big Risk to Banks

Why will small businesses effectively get punished for banking failures?

Traditional banks generally don’t like lending money to small businesses. Banks don’t hate small businesses–they hate risk. 

While small businesses account for 99% of employment, the large majority of companies fail within the first 3 years of existence. For banks looking to build cash reserves, putting money into a high-risk investment with a 30% probability of success doesn’t seem too smart.

It sounds harsh, but that’s how the bank views any client interested in borrowing money.

Big Risk Means Big Hedge and Higher Interest Rates

The fact that interest rate hikes indirectly triggered the SVB collapse might be taken as  a sign of caution about raising interest rates further.

The Federal Reserve certainly wouldn’t choose to raise interest rates in the midst of so much financial turmoil. Would they?

Yes, they would.

Remember the purpose of the interest rate hikes. The Federal Reserve wants to slow down the economy by reducing demand. Reducing demand includes slowing hiring and incentivizing taking money out of the economy.

Higher interest rates generally slow demand for borrowing and increase the incentive for saving. More money in the bank means less money in the general economy–mission accomplished.

Unfortunately, while the bank crisis bubbled up, job growth exceeded expectations. While inflation remained the same year-over-year, it still increased.

The Federal Reserve has plenty of motivation to keep raising interest rates. The European Central Bank (ECB) chose to raise interest rates even in the shadow of a Credit Suisse failure.

Will You Need Capital in the Next 6 Months? Get It Now!

So if you need business capital, go ahead and get it now. If you don’t need business capital now, but suspect you might within the next 6 months, don’t wait until later to apply.

The cost of business capital will only rise in the next few months, as interest rate hikes have been forecast to continue. Get your business credit now at a lower interest rate before they rise again.

Even worse than the higher interest rate, will be the limited amount of cash available to borrow. You’ll pay more for less over the next 3 to 6 months when it comes to funding.

Remember that the banks need cash. Remember that the banks hate risk.

The credit crunch will be coming to small businesses everywhere. Be smart and prepare for hard times ahead.

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