Since the height of the COVID-19 pandemic, new businesses are opening at a record pace. New businesses tend to be smaller based on number of employees as well as annual revenues. While new businesses make up a greater portion of new commercial credit accounts, they receive less credit. In addition, a very small portion of new businesses actually seek traditional commercial credit.
The diversity of funding sources that new businesses use can include personal savings, loans from family and friends or even grants. However, many of these sources currently face challenges.
- Lenders are tightening credit criteria
- Borrowing is more expensive with interest rates high since the Federal Reserve increased rates 500bps over the past year and a half
- Personal savings rates are down significantly after record savings during the pandemic
- With lower savings, banks have less cash on hand to lend
What I am watching:
As funding becomes scarce and more expensive, new business formations may begin to slow and the business failure rate is likely to grow. With fewer new
business ventures, individuals may re-enter the traditional labor market which would create more competition for jobs and increased unemployment in the
coming months.
