Many small businesses are facing increased scrutiny from financial institutions due to the fallout from the Silicon Valley Bank (SVB) closure.
On March 10, SVB, one of the nation’s largest startup financiers, abruptly collapsed, followed by the failure of three other lending institutions. While the long-term impacts of the event have yet to be determined, the ensuant panic immediately placed new financial pressures on entrepreneurs. A study by the National Federation of Independent Business (NFIB) found that 9% of small business owners found it more challenging to borrow money in March and expected the situation to worsen in the coming months. This is the worst credit outlook reported by the NFIB in over a decade.
Industry data sheds additional light on the challenges borrowers now face. According to the Biz2Credit Small Business Lending Index, loan approval rates at bigger lending institutions hit their lowest in nearly two years during March, as both large and small banks exercised more caution when processing small business loan applications. Biz2Credit CEO Rohit Arora directly attributed the decline to the failure of SVB earlier in the month. “The collapse of Silicon Valley Bank shook the confidence of small business owners. Many of them rushed to take their deposits out of small and midsize banks. That hurt the banks’ ability to lend,” he commented.
While the collapse of SVB could have far-reaching consequences for many, the bank’s former prominence in the startup environment places entrepreneurs at special risk if the situation worsens. However, even though professionals in the sector are well aware of the implications, the community has remained surprisingly calm. According to the NFIB, the optimism index, a measurement of economic confidence, fell by less than one point among small business owners in March, ending the month with a score of 90.1.
While this may sound like indifference, the reality is that cautious lenders are far from the only challenge facing small business owners at the moment. Entrepreneurs continue to feel the impacts of labor shortages, inflation and interest rate hikes, and the collapse of SVB and other banks is only the latest in a series of fallouts resulting from the COVID pandemic. While early-year reports of improving economic conditions are encouraging, tensions between entrepreneurs and financial institutions will likely last well into the coming months, regardless of whether the banking crisis accelerates or stabilizes.