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Small Businesses Are In Limbo Due to New Borrowing Obstacles
Banks are tightening lending standards and small businesses
are paying the price.
Some entrepreneurs are finding it more difficult to get a new loan or have had existing credit lines cut. Others report stricter terms, higher borrowing costs, longer waits and tougher questions from their bankers. Nearly half of banks reported stricter loan standards for small businesses in the past three months, according to a survey of senior loan officers released by the Federal Reserve Board in May. More than half said they expect to tighten small-business lending standards further in 2023.
Many small businesses are reluctant to borrow, particularly at today’s high rates. The median interest rate for a variable-rate, small-business term loan was 7.44% in the fourth quarter, the last period for which data is available, up 3.42 percentage points from a year earlier, according to the Federal Reserve Bank of Kansas City. Banks have continued to raise rates this year in response to Federal Reserve rate increases, said Ami Kassar, CEO of business-loan adviser MultiFunding.
Banks began tightening lending standards last year, amid worries about a slowing economy. The collapse of Silicon Valley Bank heightened concerns about liquidity. Deposits flowed from superregional banks to the nation’s biggest lenders after SVB’s collapse, according to a Federal Reserve Bank of New York analysis.
As the Federal Reserve boosts interest rates, banks must pay depositors more to keep them from moving money to higher-yielding investments, which translates into higher costs for borrowers. Some banks have also slowed loan growth to get the mix of loans and deposits to more comfortable levels. Falling asset values, deteriorating credit quality and a reduced tolerance for risk have also dimmed banks’ appetite for new loans.
Small businesses tend to borrow from small banks and are less likely to secure loans from the banking giants. “The alternative to borrowing from your local small bank is another form of financing that is going to be notably more expensive,” said Goldman Sachs chief U.S. economist David Mericle.
The appetite for lending varies by bank, and can turn on both the health of the business and the bank’s financial situation. Tightening has been most pronounced at midsize banks, according to Federal Reserve data.
Some banks are directing more customers to Small Business Administration loans, which carry a government guarantee. SBA loans typically have higher interest rates than conventional loans, but can require lower down payments and have longer terms, reducing monthly outlay.
Due to AI, nearly half of small business owners intend to reduce hiring. Most are looking to ChatGPT, Google Bard, and Microsoft Bing AI to replace human employees.
Small business owners are hoping to employ artificial intelligence instead of humans in the next year—but they don't believe the technology is coming for their own jobs anytime soon. FreshBooks surveyed 1,000 small business owners in the United States and Canada about their current use of AI and what they predict about using it in a year. A quarter of those surveyed said they're already using ChatGPT, Google Bard, and Microsoft Bing AI in their businesses, mostly to write content, create images, and do research. Forty-four percent of small-business owners expect to hire fewer people in the future because of AI capabilities. But two-thirds believe AI won't come for their own jobs. The industries owners that expect to be impacted the most are analytics (52%), sales and marketing (46%), customer communications (45%), accounting and finance (42%), planning/strategy (40%), service/delivery (29%), and hiring/recruiting (28%). Those surveyed are not unaware of the many issues regarding AI. Eighty percent said they are concerned about privacy, as well as ethical and intellectual property issues associated with AI. But it seems those concerns haven't given them too much pause when it comes to their own use of AI.
Navigating Unprecedented Challenges in Hiring and Retention
For small business owners, hiring and retention issues continue to be major concerns. Employers can increase their efforts in retention and recruitment by following these tips.
After high post-pandemic resignation levels spurred a trend that’s been called The Great Resignation, employers are still seeing mass departures. In today’s job market, professionals seek employers that offer extensive health and savings benefits, flexible working arrangements, and other perks. Additionally, existing workers are more willing to leave a job for a role that’s more fulfilling and better suits their lifestyle. With so many professionals raising their standards, employers are having a hard time recruiting and keeping talented team members. We’ll explore why hiring and retention are so challenging today and share best practices for building a long-term team of engaged workers. Hiring and Retention Are Harder Than Ever According to SCORE’s Employee Engagement report, small businesses face challenges when hiring employees and experience even more difficulties trying to retain and engage them. Here are some of the report’s findings:
60.7 percent of small business owners rank hiring the right talent as a top challenge.
33 percent cite retaining and motivating employees as a concerning issue.
84.3 percent of small business employers report challenges with hiring new employees.
45.8 percent report difficulty retaining existing staff.
Additionally, lack of employee engagement in the workplace contributes to retention challenges: 62 percent of employers say they struggle to keep employees engaged and productive. Employees are the backbone of most companies — particularly small businesses. Without proper talent, they’ll struggle to stay afloat. Additionally, high turnover can lead to expensive and desperate recruitment and training strategies to help fill the talent gaps. Why Businesses Are Having a Hard Time Hiring and Retaining Employees Here are some typical challenges employers face when trying to hire, engage and retain excellent team members.
Workers feel overworked and underpaid. According to the SCORE report, 59.3 percent of small business owners cited wages as the primary cause of disengaged employees. Employees who feel overworked and underpaid won’t put forth their best work. That’s likely why, according to ResumeBuilder, 1 in 4 workers are “quiet quitting,” doing only the bare minimum required in their roles. Additionally, if a candidate perceives a job offer as unfairly compensated, they’ll keep looking.
Healthcare benefits are lacking. In addition to the issue of low wages, 39.1 percent of small business employers say healthcare benefits are a driving factor behind hiring and retention woes. Health insurance is a hefty expense for individuals, especially in today’s economy. If a business doesn’t offer health insurance as part of its employee benefits plan, it won’t receive nearly as many job applications from qualified professionals.
Employee burnout affects engagement. SCORE found that 38.5 percent of small business owners deal with unmotivated workers. This stat is on par with increasing rates of employee burnout. Employees can’t perform at their best if they feel overworked, underpaid, and under-appreciated. Additionally, workplace stress from micromanagement and a lack of career growth opportunities can cause even the most loyal workers to mentally check out or seek employment elsewhere.
Employers can’t find skilled workers. Another hiring challenge is finding people with the right in-demand career skills. SCORE revealed that 23.4 percent of small business owners struggle with unqualified workers. Whether due to a lack of proper training and experience or a skills gap in the market, this directly impacts many businesses’ bottom lines.
How Your Business Can
Recruit and Retain Candidates
1. Offer a generous compensation plan.
To attract and retain workers, 59.1 percent of small business owners have increased employee salary ranges, according to the SCORE report.
“Retaining talent will often go hand in hand with wages,” explained Andrew Fennell, former recruiter and director at StandOut CV. “Companies need to pay fairly for the current market and regularly reflect on if they are still competitive. Employees will follow the money, and this is probably the most simple but common problem with retaining talent.”
However, many small businesses lack the budget to offer competitive salaries. In these cases, other ways to compensate your workers include offering health insurance, employee retirement plans, referral programs and unlimited paid time off (PTO).
2. Provide career development opportunities.
Many small business owners (41.3 percent, according to SCORE) are starting to offer professional development opportunities to employees so they feel more appreciated and engaged in their roles.
“In terms of career development, offering opportunities for training, skill development and clear pathways for advancement can increase employee loyalty,” advised Jacob Hinson, founder of eLocker. “Employees are more likely to stay with a company where they can see a future for themselves and feel they are growing professionally.”
3. Create flexible work options.
Remote work reached a pinnacle during the pandemic, and its popularity shows no signs of slowing down. According to SCORE, 36.8 percent of small business owners now offer more flexible work policies to appeal to professionals who value the freedom and work-life balance flexible schedules afford. To showcase flexibility as a workplace incentive during recruitment, highlight this perk on your career page or in your job description.
4. Build a positive company culture.
Employees deserve to enjoy going to work each day and not hate their jobs. SCORE found that 46.2 percent of small business owners showcase a more attractive company culture to help recruit and retain employees. A positive company culture provides an inclusive environment that eliminates hiring biases and ensures every employee feels like an integral part of the team.
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References: Dow Jones & Company. (2023, June 1). New borrowing hurdles leave small businesses in limbo. The Wall Street Journal. https://www.wsj.com/articles/new-borrowing-hurdles-leave-small-businesses-in-limbo-89cf1ea3 Hiring and retention tips for small business owners. Business News Daily. (n.d.). https://www.businessnewsdaily.com/hiring-retention-difficulties Steele, C. (2023, May 31). Almost half of small business owners plan to cut hiring because of ai. PCMAG. https://www.pcmag.com/news/almost-half-of-small-business-owners-plan-to-cut-hiring-because-of-ai