As banks impose stricter lending standards, small businesses are feeling the pressure. The task of securing new loans or preserving current credit lines is becoming more difficult for entrepreneurs as they face rigorous conditions, increased borrowing charges, and extended delays.

A recent Federal Reserve Board survey indicated that about half of the banks have tightened their lending criteria for small businesses in the past quarter, and this is expected to continue throughout 2023. Consequently, small businesses are reluctant to borrow, especially given the current high interest rates. The Federal Reserve Bank of Kansas City reported that the median interest rate for a variable-rate, small-business term loan had risen to 7.44% in the last quarter of 2022, up by 3.42 percentage points from the previous year. Concerns over capital accessibility have escalated, with 77% of small businesses expressing such concerns in April, a significant jump from 23% a year earlier.

Banks started tightening lending standards last year due to worries over a slowing economy. Factors like increased Federal Reserve interest rates, decreasing asset values, deteriorating credit quality, and a reduced risk appetite have further fueled this trend. Small businesses typically rely on smaller banks for loans and face more hurdles with larger institutions. Lending standards vary between banks and are dependent on both the financial health of the bank and the business. Midsize banks, in particular, have shown the most pronounced tightening.

Banks favor customers with deposits and other relationships, now more than ever. Some institutions are directing clients towards SBA loans, which carry government guarantees. These loans typically have higher interest rates but require lower down payments and offer longer terms. Loan approval waiting times have increased as banks reassess their portfolios.

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