Small-business capital access in a higher rate environment

  • Small businesses are currently facing several challenges that are affecting their bottom lines. Rising costs and higher interest rates highlight the increased importance of small-business access to capital.
  • Fintech firms might have faster approval processes, but highly regulated bank options and programs coordinated with the Small Business Administration provide more flexibility at competitive rates. Additional bank benefits include credit card rewards and account management support.
  • As a result, banks tend to score very high in small-business satisfaction surveys.

By Daniel Brown
ABA Data Bank

Access to capital is routinely one of the primary concerns of small-business owners, and inflation is currently one of the key contributors of cashflow challenges for small businesses. As figure 1 shows, the percentage of small-business owners in a Chamber of Commerce survey citing inflation costs as a concern has increased from 23 percent in Q4 2021 to 54 percent in Q1 2023. A Goldman Sachs survey in May 2023 found more than 75% of surveyed businesses were concerned about the availability of capital. In addition, the National Federation of Independent Business Economic Trends Survey found that small-business optimism has been below the historical average for the last 15 months, and inflation remains the top concern of small-business owners.

Figure 1. (Click image to enlarge and share.)

Prices of many key inputs for small businesses have risen considerably over the past several months. Notably, prices tied to transportation and logistics as well as various agricultural and other commodity prices have all exceeded the headline inflation print. These costs adversely impact small businesses because they lack the scale and resources to absorb these costs relative to their larger competitors.

The recent banking turmoil has yet to lead to significant credit tightening in the small-business lending space. According to the April 2023 Senior Loan Officer Opinion Survey, half of surveyed banks did not tighten lending standards for loans to small firms over the previous three months. While 45 percent of banks did somewhat tighten standards during the same period, this figure is up only slightly from the January 2023 statistic of 40.6 percent. Therefore, there is preliminary evidence that banks are still providing the necessary liquidity needed by small-business clients during these potentially uncertain times.

Small-business access to capital

Figure 2. (Click image to enlarge and share.)

Currently, there is no comprehensive estimate of the true size of the small-business lending market. The best assessment of the total size of the industry comes from the SBA Office of Advocacy, with recent estimates of small business lending totaling $1.4 trillion in 2020 (figure 2). It should also be noted that the outsized increase in figure 2’s estimate of small-business lending in 2020 is predominantly from the Paycheck Protection Program, which ultimately provided almost $800 billion in emergency funding for small businesses. Finally, because of the relatively new nature of nonbank (fintech) lending to small businesses and their lack of consistent reporting and regulation, understanding the market share of fintech lending is also difficult to quantify precisely.

Low interest rates and grant programs largely satisfied small-business capital needs during 2020 and 2021. High frequency data from the U.S. Census Bureau Small Business Pulse Survey shows that while demand for capital increased when the PPP was closed at the end of 2020, those capital needs were quickly met when the program restarted in 2021. As pandemic aid programs have concluded and inflation has started to impact bottom lines, an increasing number of small businesses need funding. Figure 3 illustrates that while the percent of small businesses borrowing at least once every three months bottomed out in the summer of 2021, this share has steadily risen over the last 2 years from 20 percent to 30 percent. An October 2022 poll from the Wall Street Journal also revealed that over two thirds of surveyed small-business owners are concerned that higher interest rates have or will impact operations for their small businesses. Therefore, small businesses will need to be even more careful in choosing funding options in this higher rate environment.

Small business financing options

Figure 3. (Click image to enlarge and share.)

Fintech loans. As a relatively new entrant into small-business lending, fintech firms have found their niche by using alternative underwriting data and quick approval decisions. However, that speed can come at a cost. Interest rates for fintech small-business loans can vary significantly but tend to be very cost-prohibitive. Fintech companies also offer factoring or “merchant cash advance” loans that can be incredibly expensive and lack clear terms. These loans are typically repaid with a percentage of sales, so they therefore have oscillating APRs based on sales volume. The APR on these advances can reach as high as 350 percent. However, because of varying APR, small-business owners may not understand the true cost of the loan.

Small-business lines of credit. For unsecured short-term funds to meet recurring obligations, small-business owners frequently turn to a line of credit. According to the 2023 Federal Reserve Small Business Credit Survey, 43 percent of surveyed small-business owners sought a line of credit, making it one of the most popular forms of financing. In terms of the type of lender that small businesses go to for a line of credit, large banks were the most popular option (43 percent), followed by small banks (30 percent) and then online lenders (22 percent). According to the FDIC Small Business Lending Survey, a small-business line of credit is widely available at banks of all sizes, with 94.6 percent of small banks and 97.9 percent of large banks offering the loan product. In terms of dollar volume, a small-business line of credit is the top small-business product for 52 percent of large banks and 31.1 percent of small banks. As expected, small businesses typically use a line of credit for more short-term uses. The FDIC survey showed that 88.6 percent of line of credit customers used the funds for working capital, and 85.6 percent used funds to buy more inventory. A small-business line of credit typically has a floating interest rate, and additional factors that impact rates include the type of financial institution (small banks typically offer the lowest rate line of credit interest rate), years in business, creditworthiness, terms and amount applied for.

Small-business credit cards. Small-business credit cards are another option for short term financing. Just like a consumer credit card, small businesses can get quickly approved for a credit card, which can be used for a variety of purposes. Data from the three largest credit card issuers show that small-business credit card transaction volume is expected to exceed $700 billion in 2023. While the average credit card (consumer and business) had an interest rate of 22.7 percent in January 2023, business credit cards had a slightly lower interest rate that month of 20.46 percent. Credit card interest rate increases have coincided with monetary policy tightening over the last year, with businesses credit cards increasing over 300 basis points over that 12-month period. Like consumer credit cards, charges to small-business credit cards can generate rewards which can be very beneficial to small businesses. According to a 2022 survey by J.D. Power, business credit cards with airline rewards had some of the highest satisfaction rates among clients. The report also mentioned that small-business satisfaction was highest with card issuers that proactively provided personalized account management resources that catered to the specific needs of borrowers.

Figure 4. (Click image to enlarge and share.)

SBA programs. SBA programs offer more flexible funding options at competitive rates. As the median small business has only 27 days of operating cash on hand, and roughly a third of businesses do not make it past the first two years, lending to small businesses can be a risky endeavor. To mitigate that risk, banks can obtain a loan guarantee from the SBA through the 7(a) program, which guarantees a portion of the loan if it goes into default. In FY 2022 there were 47,679 loans for almost $26 billion that were approved via the 7(a) program.

Loans guaranteed through SBA’s 7(a) program also have flexibility in terms of loan purpose, loan size, and loan terms. Permissible 7(a) loan purposes include both short term and long term uses including real estate, working capital, inventory, equipment, and others. Small businesses use the 7(a) program for a wide range of loan amounts. As figure 4 shows, almost half of 7(a) loans in FY 2022 were for less than $150,000 but borrowers can apply for as much as $5 million. Finally, flexible repayment terms for borrowers are an additional popular facet of the program. According to the SBA, the maximum maturities for 7(a) loans are 10 years for equipment, inventory and working capital loans, and up to 25 years if the funds are used for real estate. The 7(a) program also offers competitive rates for borrowers. As figure 5 shows, interest rates on 7(a) loans stay about 250 basis points above the bank prime rate. In a rising rate environment, the relatively constant spread of 7(a) loans may make them more attractive than products from fintech firms that have a higher cost of funding when interest rates are well above the zero lower bound.

Figure 5. (Click image to enlarge and share.)

Despite the competitive rates and versatility, there are a few factors small businesses need to keep in mind about the program. First, because the program is intended to facilitate lending, applicants must meet a “credit elsewhere test” that ensures the applicant is unable to obtain the loan on reasonable terms without a federal government guaranty. Next, the lending decisions typically take longer than other loan products, and because the loans are guaranteed by the government, approval standards are relatively high. Next, Congress appropriates a set amount of money each year for the program. Therefore, there is a lending cap on the amount that can be guaranteed in a given year. The program frequently gets close to the lending cap and sometimes requires an additional congressional appropriation so that financial institutions can process more 7(a) loans.

For comparison, the SBA’s next most popular program, the 504 program, approved 9,254 loans worth $9.2 billion in FY 2022. While there are several differences between the two programs, the biggest differences are that 504 loans are typically larger in size and are intended for more capital-intensive projects such as purchasing buildings or land, new facilities, and long-term machinery and equipment. Therefore, in FY 2022, the median 504 loan amount was about $679,000, which was more than triple the median 7(a) loan of $200,000. Also, while the 7(a) program guarantees funds administered by banks, the SBA only guarantees the portion of a 504 project that is financed by a certified development company. CDCs are nonprofit organizations that are certified and regulated by the SBA and work with SBA and participating lenders (typically banks) to process 504 loans.

Small business perspective on lending experiences

Figure 6. (Click image to enlarge and share.)

Small-business lender satisfaction rates at banks routinely eclipse nonbank competitors. As figure 6, from the Federal Reserve Small Business Credit Survey, shows that small-business borrowers have the highest satisfaction rates with small banks while online lenders receive the lowest scores. These results have stayed consistent which each new survey dating back to the first version in 2018. Furthermore, net satisfaction, which is the share of firms satisfied minus the share of firms dissatisfied, has decreased significantly for online lenders over time, declining from 35 percent in 2018 to 29 percent in 2022.

Even though this survey was conducted in 2022 when interest rates were coming off of all-time lows, interest rates and unfavorable repayment terms were among the main drivers of overall dissatisfaction rates. According to the survey, online lenders have an advantage in terms of faster approval times and a higher share of accepted applicants. However, small businesses that borrowed from online lenders were more likely to raise concerns regarding interest rates and repayment terms. While just 18 percent of borrowers at small banks cited high interest rates as a concern, 43 percent of borrowers at an online lender said interest rates were a challenge. Small-business owners also said unfavorable repayment terms were more of a challenge at online lenders, with 34 percent of applicants at online lenders saying repayment terms were unfavorable compared to just 9 percent of those who borrowed from a small bank. These higher rates and more unfavorable terms were contributors to 61 percent of small businesses saying they had challenges with fintech lenders compared to 50 percent of borrowers at large banks and 40 percent of borrowers at small banks.


Small businesses have faced a variety of challenges in recent years, but one of the most important among them is ensuring they have the financial resources to stay open, operate, and potentially expand. Looking ahead to future challenges, a higher interest rate environment will likely have a more adverse impact smaller businesses that typically lack significant financial resources and may lack the expertise to assess the advantages and disadvantages of various types of business loans.

While nonbank funding alternatives tend to have faster approval processes, bank options tend to result in higher satisfaction rates, and programs in coordination with the SBA can provide flexible options at competitive rates, along with additional benefits. Therefore, funding options via banks may become even more attractive in a higher-rate environment.

Daniel Brown is a senior director and economist at the American Bankers Association.