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Diminished Supply and Demand Cause Tighter Loan Market for Small Businesses

  • The Paycheck Protection Program gave out billions in loans to small businesses suffering from the effects of the COVID-19 pandemic, but other business loans are becoming scarcer
  • Less than one in four loans were approved in July, compared to pre-pandemic levels of around 50 percent
  • Banks are less willing to take on the risk of lending to businesses, while companies have also held off on investment plans

Businesses seeking a loan from a bank, credit union, or alternative lender have faced a tougher market during the COVID-19 pandemic. One lender survey shows that the majority of these types of institutions have tightened their standards for small business loans. Another indicates that while some lenders approved more than half of the small business loan applications they received in February, only about one in five applications to small banks or credit unions were approved in July.

The situation results from an increased unwillingness among both lenders and businesses to take on risk during the pandemic. Lenders are less likely to invest in small business loans due to the ongoing uncertainty over the economic impact of the pandemic. Businesses have also been less likely to seek funds as they hold off on investments or cut costs.

Another survey by the National Federation of Independent Business in July found small business owners tempering their expectations for improved business conditions. About half of these respondents said they had invested in their business within the past six months, but just 11 percent said they considered it a good time to expand their business.

Businesses may also have favored the federal Paycheck Protection Program in recent months. More than 5 million loans, totaling over $525 billion, were approved through this program. However, PPP demand later dropped off and the program ended with $126 billion unappropriated.

Banks stand to collect billions in processing fees for handling PPP loans, with larger institutions collecting the bulk of these funds. However, many banks have promised to direct these profits to causes such as community economic development initiatives and small business assistance.

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