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 touted in April.
But inflation surged to the highest level in a generation and remains the single most important problem for 29% of small businesses surveyed in August by the National Federation of Independent Business.
Though that’s eight points lower than July’s highest reading since the fourth-quarter 1979, many small business owners still struggle to stay afloat but find fewer options than most businesses.
“A bank won’t even talk to me,” Chef Wanda Blake, owner of Wanda’s Cooking in Oakland, California, said. "I have no collateral. And to get a bank loan, they would have to go through my credit history. A bank’s not set up to identify with me as a person and what I want to do.”
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Who are small business owners?
There were 30.2 million small U.S. businesses in 2018, according to the Chamber of Commerce. Of those, 22 million were individually operated, meaning they have no other 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 Chamber said.
Women of color are the fastest growing entrepreneurs, increasing at 4.5 times the average rate, said Luz Urrutia, chief executive at Accion Opportunity Fund, which provides financial support, counseling and networking for small businesses that advance racial, gender, and economic justice.
Why do small business owners suffer more?
Soaring inflation eats into already slim profits. Between July 2021 and July 2022, overall profits fell about 4% overall for small businesses despite an 87% surge in revenues, according to a survey of 550 small business leaders by Kabbage, part of American Express, released last month.
Even grimmer, 75% of respondents reported feeling impacted by inflationary pressures and 56% expected pressures to last at least a year until summer 2023.
“Gas is cheaper (since June), but not much else,” National Federation of Independent Business Chief Economist Bill Dunkelberg wrote in a report. “Looks like we’ll have to rely on the Federal Reserve for some policy help, and we’ll probably get a heavy dose of it.”
The Fed has raised its short-term benchmark fed funds interest rate by 3% this year, including a whopping 0.75% each of the last three times, and isn’t yet done. Rate increases raise borrowing costs, which should cool spending and get inflation under control.
Whether inflation will come down quickly or the economy will fall into recession or stagflation (slow to no growth and high inflation) has yet to be seen, and small business owners are worried and may need a loan to stay afloat. But that’s often easier said than done for various reasons including not having a long enough business or credit history, not having enough revenues or assets, not wanting to borrow enough to make it worthwhile for big banks, or just being part of an underserved community.
Some entrepreneurs end up feeling desperate and falling to 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.
What can small businesses do?
“This past year, the biggest struggle was inflation of raw goods materials and shipping costs,” said Jamahl Grace of Grace + Love Candle Co. With skyrocketing prices and uncertain deliveries, Grace needed a little cash to "bootstrap” his busiest time, the holidays.
“A lot of banks want to loan you $50,000 or $100,000 at a much higher interest rate,” but Grace said he only needed about $6,000.
Since he uses QuickBooks accounting software, QuickBooks Capital had information on Grace’s business from his accounting entries and could offer him a tailored, preapproved loan. He just had to confirm his identification and loan amount to get the loan the same day. A traditional bank would have required documentation and a manual review that could take days or weeks.
“The ease and speed (of the loan) create a blanket of comfort for businesses,” Rob Daniel, QuickBooks Capital director of product management, said. “They know the money’s there and ready, even if they don’t need it.”
Blake went another way, using the international nonprofit Kiva, which allows people worldwide to crowdfund micro loans. Blake liked that she could share her personal story and explain why she needed a loan.
Lenders then browse people’s needs and choose to loan as little as $25. Borrowers get 100% of the funds people loan and repay their lenders when they start making money. Kiva says borrowers have a 96.4% repayment rate on average.
Kiva “depends on my friends, family and community – on who I am and what I’m trying to do for my community,” she said. Blake was surprised and touched, some of her customers found her on Kiva and loaned money to help. “My customers became my investors,” she said.
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Blake launched the next stage of her business – a pantry on her website to sell ‘Pepper Chowchow,’ a traditional Southern condiment – at the start of the pandemic in 2020. She had no idea then the toll the pandemic would take on her business and the inflation that would come with it.
"The supply of sweet pepper was short, and as a result, the price went up from $32 to $64 a case," Blake said. Instead of raising prices, she used her Kiva loan to absorb the added costs.
Kiva sees “surges in need when things are tough, when banks stop lending,” Kathy Guis, Kiva vice president of investments, said.
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Kiva expanded eligibility in 2020 to accommodate more borrowers, said Guis. “Two-thirds of our borrowers have been in business less than three years.”
With inflation holding near a 40-year high, Blake may need more help from her Kiva community. She planned to buy a label machine for her production with her Kiva loan but had to use it to cover other rising expenses.
But even with another Kiva loan, inflation is again making her delay buying that label machine.
"The label machine is a low priority because other expenses are a higher priority – like rent and salaries," she said. "I don't think a label machine will be budgeted in another Kiva loan."
Maybe next year.
Medora Lee is a money, markets, and personal finance reporter at USA TODAY. You can reach her at firstname.lastname@example.org and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
This article originally appeared on USA TODAY: Small businesses lean on micro loans to survive inflation