Small businesses began to turn back to traditional lending sources in 2022, after more than two years of pandemic-related financial assistance bolstered their balance sheets.
About 40% of small businesses applied for loans, lines of credit or cash advances last year, up from 25% in 2021, according to a survey by the 12 regional Federal Reserve banks. At the same time, only 34% of the firms reported relying on pandemic-related funding programs, down from 77% the previous year.
"Once pandemic-related funding became less available, we expect [small businesses] may have been turning more to those sources they had relied on pre-pandemic — banks and nonbank lenders," said Ann Marie Wiersch, community development policy advisor at the Federal Reserve Bank of Cleveland.
But companies have become more likely to use financing to cover short-term costs such as operating expenses, the survey showed. Before the COVID-19 pandemic, businesses were more likely to apply for a loan to expand their operations.
Last year, close to 65% of small businesses that applied for credit cited a need to meet their operating expenses, up from 45% in 2019. More than half of them reported that paying operating expenses had been a financial challenge within the past 12 months. And about 53% of hopeful borrowers said they would use the funds to expand their businesses, down from 56% in 2019.
Where they're going for credit is changing, too.
The percentage of small businesses that say they applied to large banks for credit has increased significantly — to 43% last year from 35% in 2019 — while the share that reported applying to small banks and online lenders fell to a combined 52% from 63% in that same period.
For overall financial services, 56% of the small firms surveyed used a large bank in 2022, while 43% turned to small banks. The Federal Reserve banks define small banks as those with less than $10 billion of deposits.
While businesses are increasingly looking to borrow directly from banks,
The regional Fed researchers noted other indicators that small businesses are returning to pre-pandemic patterns, including higher rates of employment and revenue increases over the past 12 months.
The Fed's survey is based on close to 8,000 responses from U.S. companies with at least one but fewer than 500 part- or full-time employees. Small businesses employ almost half of Americans, according to the Bureau of Labor Statistics.
The share of firms expecting both revenue and employment growth within the next 12 months declined in 2022, highlighting the economic uncertainty and financial challenges some businesses are facing.
More than 80% of the small businesses that were surveyed reported inflation as a financial challenge within the past 12 months.
"Choices regarding work, savings and the expansion of business enterprises are likely to be harder when there is uncertainty about the likely future course of prices," Federal Reserve Gov. Philip Jefferson said during an address last week.
