After a tumultuous first half of 2023 for U.S. banks, many observers fear that a credit crunch is fast approaching, if it hasn’t already begun to take effect.
Nationwide, small businesses are feeling the pressure, according to a report by Goldman Sachs 10,000 Small Businesses Voices. In a survey of 1,740 businesses throughout the U.S., including some in Rhode Island, 77% said they have concerns about their ability to access capital.
Such results become more striking compared with last year’s landscape: In 2022, 77% of businesses surveyed reported confidence in accessing capital.
In Rhode Island, some observers say that a strong presence of community banks could have a significant impact on small businesses – as to whether that effect is helpful or harmful, it depends on who you ask.
Economic shocks such as the collapses of Silicon Valley Bank, First Republic Bank and Signature Bank, as well as the squabbling over the U.S. debt ceiling in Washington, could combine to create economic turbulence at a vulnerable time, said Peter Nigro, a Sarkisian chair of financial services at Bryant University.
“We’ve seen credit crunches before in the ’90s and the mid-2000s, so I think it’s nothing new,” Nigro said. “But this time, it seems like it’s a lot of bad things happening at once.”
In fact, he says, financial services giant Fidelity Investments Inc. recently donated a 250,000-square-foot Smithfield building to the neighboring Bryant University – a facility that was estimated at $32.6 million in 2022.
While a welcome gift for Bryant, it could be a darker sign of the state of the economy as a whole, Nigro says.
“They don’t need that space anymore,” Nigro said, “so think of taking the Fidelity gift in that perspective.”
Amid these precarious economic conditions, local banks could face additional troubles due to factors such as their wide footprint in the commercial real estate market, which has taken a particularly hard hit as a result of enduring remote and hybrid workplace trends since the COVID-19 pandemic, Nigro says.
These anxieties are apparent in the Goldman Sachs 10,000 Small Businesses Voices survey, in which 17% of participants had applied for a small-business loan in the past three months. Of those businesses, 61% reported difficulty borrowing money affordably, and 60% said that rising interest rates are affecting their ability to pay off debt.
Despite these concerns, some small-business owners in Rhode Island find that working with smaller banks allows a closer relationship that alleviates some financial anxieties.
Among those business owners is Rebecca Twitchell, owner of Half Full LLC consulting agency in Providence, who works with Bank Rhode Island, a subsidiary of Boston-based Brookline Bancorp Inc.
“When it comes to accessing capital, I have a great relationship with my bank, so that’s not a huge concern of mine,” Twitchell said.
This established relationship can play an essential role in maintaining access to capital at some financial institutions, such as BayCoast Bank, which is headquartered in Swansea.
Due to credit crunch concerns, the bank is “giving priority to our existing customers,” said Carl Taber, BayCoast’s executive vice president and chief lending officer.
“We’re not looking to bring on any new customers at this time because we want to make sure we have ample funds for our existing customers who do need to borrow,” Taber said.
“This is the first time we’ve had a large amount of increases [in interest rate] that the [Federal Reserve] has done in multiple moves,” Taber said. Previously, banks were dealing with increases of 24 basis points, he said, while current fluctuations have come in the form of increases of 75 basis points.
A more troubling issue for many of Twitchell’s clients is red tape that prevents businesses from getting grants and other financial assistance offered by the state.
“I do think that when it comes to contract work, work with the government and different ways of creating grants and things like that, I think the length of time it takes and what you need to submit to get into the running is a big thing in Rhode Island,” Twitchell said, adding that a more-streamlined process would benefit the state’s small-business ecosystem.
Overall, Twitchell said, the businesses she works with have been “able to weather the storm, but they’re being very strategic in how they do that,” including methods such as getting creative in offerings and securing partnerships.
Katie Schibler Conn, owner of KSA Marketing in Warwick, also sees her business’s relationship with BankNewport as a pillar amid economic uncertainty.
Businesses working with larger, national and global banks “don’t have that person-to-person relationship,” Schibler Conn said. In her business’s own dealings with a local bank, she said, “If we’re struggling with something or we need a new solution or new product, we’re dealing with real people who know our business.”
But this source of stability doesn’t overcome the larger economic uncertainty that looms over the country as a whole, Schibler Conn adds.
“I think the hardest part is pre-2022, businesses had a steady ebb and flow year over year,” Schibler Conn said. Now “we have to basically use what we believe the market can bear and where the market is at, instead of any benchmarks from the past.”
Amid the credit crunch, some small businesses are also just now reaching the end of their pandemic relief grants, says John W. Kennedy, vice president and team leader of the centralized underwriting unit at The Washington Trust Co.
Washington Trust hasn’t stopped taking new clients, Kennedy said, but he anticipates a recession in the second half of 2023, which he said businesses should factor into plans such as requests for new lines of credit.
“We have a pretty confined credit protocol, and we stick to that,” Kennedy said. The bank will take a look at potential borrowers, but he added that “sometimes, we cannot help people. We have to be pretty upfront about that.”
