Small businesses rely on microloans to survive inflation

Americans applied last year to start a record 5.4 million new businesses, with Hispanic Americans applying at the fastest rate in more than a decade and 23% faster than pre-pandemic levels , the White House announced in April.

But inflation has hit its highest level in a generation and remains the biggest problem for 29% of small businesses surveyed in August by the National Federation of Independent Businesses.

Although that’s eight points lower than July’s highest reading since the fourth quarter of 1979, many small business owners are still struggling to stay afloat, but are finding fewer options than most businesses.

“A bank won’t even talk to me,” said chef Wanda Blake, owner of Wanda’s Cooking in Oakland, Calif. “I have no collateral. And to get a bank loan, they would have to look at my credit history. A bank is not set up to identify me as a person and what I want to do.”

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Who are the small business owners?

There were 30.2 million small American businesses in 2018, according to the Chamber of Commerce. Of these, 22 million were individually operated, meaning they have no employees other than the owner.

Women owned 11.6 million, or 38.7%, of small businesses and minorities owned 8 million, or 26.5%. Veterans owned 2.4 million, or about 8%, the House said.

Women of color are the fastest growing entrepreneurs, growing 4.5 times the average rate, said Luz Urrutia, chief executive of Accion Opportunity Fund, which provides financial support, advice and networking to small businesses that advance racial, gender and economic justice.

Why are small business owners suffering more?

Soaring inflation is eating away at already thin profits. Between July 2021 and July 2022, overall profits fell about 4% overall for small businesses despite an 87% increase in revenue, according to a survey of 550 small business owners by Kabbage, which does part of American Express, released last month.

Even gloomier, 75% of respondents said they felt affected by inflationary pressures and 56% expected the pressures to last at least a year until the summer of 2023.

“Gas is cheaper (since June), but not much else,” Bill Dunkelberg, chief economist for the National Federation of Independent Business, wrote in a report. “Looks like we’ll have to rely on the Federal Reserve for policy help, and we’ll probably get a heavy dose of that.”

The Fed has raised its benchmark short-term federal funds interest rate by 3% this year, including a whopping 0.75% each of the last three times, and it’s not done yet. Rate hikes increase borrowing costs, which should restrain spending and keep inflation in check.

It’s not yet clear whether inflation will drop quickly or the economy will slide into recession or stagflation (slow or no growth and high inflation), and small business owners are worried and may need a loan to stay afloat. But that’s often easier said than done for a variety of reasons, including not having a long enough business or credit history, not having enough income or assets, not wanting to borrow enough for that worth it for the big banks, or just being part of an underserved community.

Some entrepreneurs end up feeling hopeless and fall into predatory lending, Urrutia said. That’s why it’s important for small businesses, especially those in already disadvantaged communities, to talk to each other and find “affordable and responsible financing,” she said.

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What can small businesses do?

They raise prices and cut expenses, but it’s often not that easy.

“Last year, the biggest challenge was inflation in raw materials and shipping costs,” Jamahl Grace of Grace + Love Candle Co. told Vacation.

“A lot of banks want to lend you $50,000 or $100,000 at a much higher interest rate,” but Grace said he only needs about $6,000.

Since he uses QuickBooks accounting software, QuickBooks Capital had information about Grace’s business from her accounting records and could offer her a pre-approved, tailored loan. All he had to do was confirm his identity and the loan amount to get the loan the same day. A traditional bank would have required documentation and manual review that could take days or weeks.

“The ease and speed (of the loan) creates a comfort blanket for businesses,” said Rob Daniel, director of product management at QuickBooks Capital. “They know the money is there and ready, even if they don’t need it.”

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Blake went another route, using the international non-profit organization Kiva, which enables people around the world to fund micro-loans. Blake loved that she could share her personal story and explain why she needed a loan.

Lenders then go through people’s needs and choose to lend as little as $25. Borrowers get 100% of the funds people lend and repay their lenders when they start making money. Kiva claims that borrowers have an average repayment rate of 96.4%.

Kiva “depends on my friends, my family and my community — who I am and what I’m trying to do for my community,” she said. Blake was surprised and touched, some of her clients found her on Kiva and loaned her money to help her. “My clients have become my investors,” she said.

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Blake launched the next stage of her business — a food pantry on her website to sell “Pepper Chowchow,” a traditional Southern condiment — at the start of the pandemic in 2020. She had no idea the consequences then. the pandemic would have on his business and the accompanying inflation.

She hadn’t budgeted for rent increases or skyrocketing shipping costs and peppers from her signature Pepper Chowchow.

“The supply of sweet peppers was short and as a result the price went from $32 to $64 a case,” Blake said. Instead of raising prices, she used her Kiva loan to absorb the extra costs.

Kiva sees “increases in need when things get tough, when banks stop lending,” said Kathy Guis, Kiva’s vice president of investments.

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Kiva expanded eligibility in 2020 to accommodate more borrowers, Guis said. “Two-thirds of our borrowers have been in business for less than three years.”

With inflation clinging to its highest level in 40 years, Blake may need more help from his Kiva community. She planned to buy a labeling machine for her production with her Kiva loan, but had to use it to cover other growing expenses.

But even with another Kiva loan, inflation again causes her to put off buying that labeling machine.

“The label machine is not a priority because other expenses are a higher priority – like rent and salaries,” she said. “I don’t think a tag machine will be budgeted into another Kiva loan.”

Maybe next year.

Medora Lee is a money, markets and personal finance reporter at USA TODAY. You can reach her at [email protected] and sign up for our free Daily Money newsletter for personal finance tips and business news Monday through Friday mornings.

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