Cash Turns Complex. Bank failures and a choppy economy threaten access to small-business loans

By Andy Medici and Ryan Lynch | Orlando Business Journal

May 4, 2023

Brandon Gardner always considered himself an entrepreneur at heart.

The now-owner of Orlando-based Premier Flight Solutions LLC said his past jobs have included running a car detailing business that eventually expanded to boats, RVs and aircraft; operating multiple food trucks with his wife; and eventually becoming a teacher at the flight school he attended to get a pilot’s license.

“I did that for a couple of years and got tired of not being in business for myself and said, ‘You know what? Screw it.’ I bought an airplane, started doing my own thing and it’s taken off ever since.”

Started in 2019, Premier Flight Solutions now includes pilot training, pilot services, aircraft management and contracted pilot services.

In the past, Gardner financed his business out of pocket or by reinvesting profits. As Premier Flight Solutions got bigger, he turned to the Small Business Administration for a loan. He now plans to seek another SBA loan to help finance an acquisition that would allow him to expand into chartered flight service.

Gardner isn’t alone, as many small-business owners are considering how to access capital as it becomes even more difficult to secure.

Less than two months after the failures of Silicon Valley Bank and Signature Bank, regulators took control of First Republic Bank and on May 1 sold the bulk of First Republic’s assets to JPMorgan Chase.

With the banking industry in turmoil, small-business owners now face the prospect of reduced access to capital as lenders get more cautious and protect their balance sheets. It’s a dynamic that threatens to limit growth opportunities for entrepreneurs and widen the gap between small businesses and their larger counterparts.

Even before the bank failures sent shockwaves throughout the sector, millions of small-business owners already were bracing for a choppier lending environment in 2023 because of economic uncertainty and rising interest rates.

The Silicon Valley Bank effect

While much of the upheaval from the recent bank failures has died down, industry experts said banks likely will experience increased scrutiny from regulators in the months to come.

That may trigger increased caution — and more scrutiny for small businesses looking for financing.

Small-business loan approval rates at large banks declined in February for the ninth consecutive month to 14.2%, according to the Biz2Credit Small Business Lending Index. Additionally, the net percentage of small-business owners anticipating easier credit conditions in the next three months hit its lowest point in five years in January, the National Federation of Independent Business found.

Lending at big banks has stalled in recent months, said Biz2Credit CEO Rohit Arora. Given the current state of affairs, small banks likely will become more cautious, as well, Arora said. “There is a real danger small businesses are about to experience a credit crunch.”

Many banks probably will have to limit their loan growth due to the impact higher interest rates have had on bank capital, said John Norris, a managing director at Oakworth Capital Bank in Birmingham, Alabama. “It is just math. When interest rates go up, bond prices go down. Obviously, this will cause overall assets to decrease. If liabilities remain the same, equity falls, by definition.”

As interest rates rise, so, too, does the required return on investment to make a deal worth it. New deals will have to generate significantly higher returns than they did a couple of years ago, Norris said. “In all likelihood, that probably means fewer new coffee shops and restaurants for a while.”

Where the SBA fits in

Signature Bank was one of the largest lenders in the secondary market for the SBA 7(a) program, buying loans from banks and freeing them up to make new loans.

Its collapse has led some lawmakers, such as U.S. Sen. Joni Ernst (R-Iowa), to suggest at a recent hearing that the industry’s turmoil could deal a blow to small-business lending. “They have now ceased buying new bids on 7(a) loans. This will make it very difficult for our lenders to have liquidity to make new loans. Especially those nondepository institutions like our small-business lending companies.”

SBA Administrator Isabel Guzman said banks should be looking more at 7(a) loans and the government guarantees they offer as they potentially shift investment strategies. “Right now, 4,000 of the 4,500 community banks who serve so many communities haven’t done an SBA loan in the last two years. We need to get them back in, simplify the program and make sure they can use their prudent credit underwriting standards in order to deliver these loans.”

The concern over the program comes as the Covid-19 pandemic and its billions of dollars in small- business rescue programs boosted the use of the SBA’s longstanding loan program. In fiscal 2021, the SBA posted a record $44.8 billion in lending across 61,000 loans from its 7(a) and 504 lending programs. In 2022, it made 62,000 loans totaling $43 billion in its 7(a), 504 and microloan programs.

The agency was working to overhaul its lending and make it easier for small businesses and lenders to participate by streamlining programs and forging partnerships with other agencies to help businesses that historically had trouble accessing capital, Guzman said.

Closer to home, Central Florida banks expect strong SBA program activity. Orlando-based Cogent Bank has seen demand rise even in the current environment because SBA loans often are more favorable for borrowers than other programs. The bank saw a lull in activity as interest rates rose, but that did not last long going into 2023, said Katrina Winberg, Cogent Bank managing director of SBA lending.

“That did cause borrowers to pause. I think they took some time to digest that. We’ve seen a return to business activity, especially since the first of the year. That demand is back.”

Cogent Bank — which provides SBA loans nationally, but most of its activity is in Florida and Georgia — expects to exceed its SBA lending totals in 2023 when compared with last year.

Underrepresentation on both sides

Rohit Mathur has seen firsthand how challenging the funding landscape is even for larger small businesses, which have more complex needs that require more time and attention.

Mathur heads up Bridge, a Citi program that connects small- and medium-sized businesses with potential lenders across the country to offer loans of up to $10 million. There was a gap for businesses seeking to bid for loans and get term sheets in response for loans of $250,000 to $10 million, he said. The process required business owners to go to each bank individually and provide detailed information — often consuming a lot of time for entrepreneurs with little to spare, Mathur said.

“We are talking about Main Street businesses that need access to capital and regional and community banks and CDFIs [community development financial institutions]. Both parties find it hard to find each other. There’s underrepresentation on both sides.”

The CDFI platform’s lenders include a large number of the minority and Black-owned banks across the country, as well as community banks and others that don’t have the marketing budgets to compete with larger banks or online lenders for the small- and medium-sized business loan marketplace. But they do have money to lend.

Connecting those dots has long been a challenge, and when capital gets tight, it often has been even harder to match qualified borrowers and lenders. Programs like Bridge aim to address the problem, and the SBA itself is also focusing on ways to connect companies with banks that have money to lend.

Avoiding lending landmines

Small-business owners searching for funding often are forced to navigate a series of misleading and predatory alternatives, said  Carolina Martinez, CEO of CAMEO, California’s statewide micro-business network. That’s especially true when capital environments tighten up.

Those options can leave business owners saddled with loans with higher-than-advertised interest rates because they have tried and failed to get loans at traditional lenders.

Martinez urged small-business owners to look for “mission-oriented” lenders, such as CDFIs. Business owners also should understand the terms of the products and ask the right questions before signing anything, she said.

“If an option looks too good to be true it usually is. It’s really important for the small business to be constantly asking about the costs and hidden fees associated with the product.”

CAMEO worked on a recent rule in California to help clamp down on predatory lending and require more information about interest rates up front in clear print on any potential loan documents. The goal is to get a national law passed by Congress to cut down on predatory lenders, Martinez said.

Federal agencies also are moving ahead with their own efforts. The Consumer Financial Protection Bureau recently released a final rule that would require all small-business lenders that make more than 100 loans per year to report on the self-identified demographic data of the small business borrower. That includes lines of credit, business credit cards, merchant cash advances as well as traditional banks and credit unions. The rule defines a small business as one with gross revenue of less than $5 million.

Senate Small Business Committee Chairman Sen. Ben Cardin (D-Maryland) along with Goldman Sachs 10,000 Small Businesses Voices and the Bipartisan Policy Center each have released their own plans for how to modernize the SBA, boost small-business funding and increase access to training and other resources at the agency. It’s unclear what appetite a divided Congress would have to take that on.

Meanwhile, Premier Flight Solutions’ Gardner in Orlando is nearly done paying off his first SBA loan and wants a second, bigger one to expand his business by acquiring another company. The SBA process with his first loan helped him establish a business line of credit, and the ability to get funding quickly was important to keep his plane flying, he said.

“It’s not the easiest to get a loan as a startup if you don’t have really clear plans in place.”