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Small Business Financing Trends to Watch

Sally Herigstad, Contributing Writer
Updated Jan 23, 2023

Small businesses face unique challenges and opportunities. Learn what's ahead for small business financing.

  • Small business owners survived a pandemic and uncertainty and now face high inflation and talk of a recession.
  • Small businesses must also grapple with high interest rates that have risen sharply.
  • Technology continues to play a crucial role in helping small business owners manage cash flow.
  • This article is for business owners seeking insight into current small business financing trends.

It’s been a rough few years for small businesses. Surviving companies adapted, stayed persistent and were willing to look for help when needed. With the worst of the pandemic and related restrictions in the past, we’re seeing high demand for goods and services. However, this demand has been so high that suppliers find it challenging to keep up, and inflation hit 8.5 percent in 2022 – its highest level since 1982. 

High demand is great for small businesses – if they have the capital to hire enough people and procure supplies to satisfy customer demand. We’ll examine the current state of small business financing to give SMBs a clearer outlook. 

Editor’s note: Need a loan for your business? Fill out the below questionnaire to have our vendor partners contact you with free information.

As business owners face unique challenges, they’ll need to understand the following:

  • Is a recession coming, and how long will it last? 
  • How will the availability of financing for small businesses change?
  • What will small business financing interest rates do next?
  • Are new government programs helping small businesses?
  • How can my small business handle economic and financing changes?

Here’s a breakdown of what small businesses should understand:  

1. A recession is likely.

With inflation at unsustainable levels, the Federal Reserve is raising interest rates. The Federal Reserve aims for an inflation rate of about 2 percent. If the only cure for high inflation is a recession, the feds seem determined to apply that cure as soon as possible.

Mary Tootikian, a mortgage broker with When Your Mortgage Matters, believes the Federal Reserve will go too far and won’t know for sure we’re in a recession until two months into it. “By the time they figure that out, they’ll start loosening it,” Tootikian explained, adding that we probably won’t see any substantial lowering of the interest rate by the feds for a while.

“Things will get better,” Tootikian said. “I don’t know when. We’ve got another few months.” Based on her experience, the feds will over-tighten and ensure we do have a recession, and then they’ll start easing up. “We’re looking at no more than six months.”

TipTip: To prepare for a recession, small business owners should get a firm grasp of their financials so they can notice the first signs of a recession’s financial impacts and adjust appropriately.

2. Small business lenders are tightening up.

Facing a recession, lenders are taking steps to protect themselves. “In the last few months, we’ve seen both banks and nonbank lenders start to tighten up,” said Matthew Gillman, CEO of SMB Compass. “[With] inflation [and] rising interest rates, we see banks’ and nonbanks’ access to capital [becoming] more difficult. We’re already seeing signs of that.”

Banks and investment markets hate uncertainty, and the current economic direction is uncertain. “Until we really understand the direction the economy is going, it’s going to be hard for small businesses to access money the way they did [previously],” Gillman noted. Lenders tend to be cautious when there’s an unknown, especially about making long-term financial commitments. There will be a restriction or tightening in lending while everyone waits to see what will happen.

Lending should ease up as uncertainty is removed. When we start to understand what’s taking place, what shape the economy is in and who is being impacted – both geographically and demographically – Gillman believes lenders will loosen up credit again. “Once lenders can understand and learn the impact, it gives them the ability to go back and start lending, start being aggressive.”

3. Interest rates are high.

We’ve all seen interest rates increase for consumers and small businesses. These rates are likely to stay high for the time being. With interest rates two or three times as high as they were just one year ago, you may need to look for alternative financing options or ways to survive until interest rates come back down.

We’re starting to hear more about seller or vendor financing, as well as alternative lenders and fintechs. Investors looking beyond stocks and bonds for a return are providing liquidity in the nonbank market.

If you don’t have access to affordable capital financing, you may need to reduce your capital needs, if possible, until credit loosens up again.

Did you know?Did you know?: Lenders are open for business, but cautiously and at high interest rates. Alternative lenders, in addition to banks, can likely provide the best business loans.

4. There are limited government programs for small businesses.

The Paycheck Protection Program (PPP) and Employee Retention Credit helped many small businesses stay open and, importantly, keep their employees on the payroll. These programs have ended and are unlikely to start up again.

In the past, Small Business Administration (SBA) loans were a great option. SBA loan rates decreased year over year because the prime rate was low. “With the prime rate rising, SBA rates for the first time in years can be close to 10 percent,” said Gillman. “They’ve gone from 3.25 percent to 7 percent.”

Businesses with current SBA loans face challenges. “Most SBA loans are variable,” said Gillman. “Most are having their rates increased. Payments are increased, which means more stress on cash flow.”

Small businesses must return to nongovernment sources of financing and assistance.

Did you know?Did you know?: The Employee Retention Credit was extended to the last quarter of 2022 for qualifying businesses. It has not been extended to 2023.

5. Technology plays a critical role in managing finances.

Business technology today is more than being able to sell inventory or take orders online. Today’s technology helps you launch e-commerce sites, implement self-service ordering, and accept online and contactless payments. But that’s just the beginning. 

Technology can help you and your team run your business better and more profitably wherever you are, 24 hours a day. You might use technology that helps predict when invoices will get paid or point-of-sale (POS) systems that track and automatically reorder inventory. Software can help you spot trends and react to changing markets, as well as keep track of your tax obligations, including potential excise tax remittances to other states.

6. Small business economic and financing changes are coming.

With lenders cutting back on certain types of financing, Tootikian sees many small business owners using their own financing, such as a HELOC (home equity line of credit). A HELOC can be a great source of operating capital because you pay interest only on the amount you’re using. “That’s going to be very dicey as equity starts dropping,” said Tootikian. “In 2008, they cut HELOCs off midstream, whether you’d paid them or not.” 

As the economy slows, ensure you have alternate funding sources in case one funding source is limited or ended by your lender. Don’t wait until you desperately need cash to line up funding. 

Depending on your business and its susceptibility to a recession, you may want to pull back until the worst of the storm is over. Tootikian recommends vulnerable clients consider sitting on the sidelines for now if they can.

Key TakeawayKey takeaway: A HELOC is a type of revolving line of credit. Other types include business credit cards, personal lines of credit and business lines of credit.

Small businesses should prepare for financing challenges

The economy is already experiencing inflation and supply chain disruptions. Energy prices are through the roof, and people are arguing about whether we’re already in a recession. Real estate sales are slowing, primarily due to high interest rates and buyers wondering what will happen next.

High interest rates and potentially lower real estate equity may reduce access to capital for some small businesses. It’s essential to find alternate funding sources or adjust capital needs before you need them.

Small businesses should prepare for financing challenges. The post-COVID-19 economy has taken off, but not in a smooth or predictable fashion. “Things will be difficult,” Gillman noted. However, there’s no need for panic. “When there’s challenges, it creates opportunities,” said Gillman. “The hard part is answering the question of what that opportunity is.”

Image Credit: OPOLJA/Shutterstock