The economy is strong, but small businesses are as pessimistic as ever. Here’s why

I don’t care how people spin it, but the economy is pretty good right now for most small businesses. Sure, some industries – like technology and manufacturing – are struggling. But GDP is relatively healthy, unemployment is low, small businesses continue to hire, the stock market is near its all-time highs and consumer spending remains strong.

But according to recent data from the National Federation of Independent Businesses, small business optimism – while now at an eight-month high – remains at historically low levels.

Why? Because for most small businesses, capital is tightening, orders are falling and the coming months are looking very uncertain. Here are five reasons why.

The bank prime rate has more than doubled

Thanks to the Federal Reserve’s unprecedented and historic increase in interest rates over the past 15 months, the average prime rate charged by banks is now 8.5 percent, which is up from 3.25 percent in early 2022. But that’s for their best customers. Small businesses and startups are riskier and much lower in the pecking order.

Many are seeing interest rates on new loans ranging from 9 percent to 12 percent from traditional banks. As these rates have increased, so have the interest rates on non-traditional loans provided by smaller lenders. For existing businesses looking to refinance their working capital, equipment and property loans, they’re looking at a huge jump in costs. Startups are being priced out of the market if they are even able to receive approval, which fewer are.

Banks are approving fewer loans to small businesses

Thanks to the rise in interest rates and some shakiness in the banking system earlier this year, many banks are second-guessing their loans to smaller businesses. They’re not only looking at their customers’ deteriorating order books (I’ll get to that later), but they’re also concerned about these customers’ ability to pay back their loans given the huge jump in financing costs. As a result, and as shown in these data, 49 percent of banks have now tightened their lending to small businesses, compared to 22 percent a year ago.

Banks are approving fewer credit card loans

It’s not just traditional loans to small businesses that are being affected. Thanks to all the factors I’ve mentioned above, more than a third of banks have now tightened their credit card lending this year. You may say that this affects only individuals, but that’s not the case.

According to a JPMorgan Chase & Co study, the majority of small business loans are from credit cards, with approximately 79 percent of small employers using credit cards for business purposes. Despite higher interest rates but because of easier availability, credit card financing is a very popular strategy used by small business owners to pay their day-to-day bills and finance their growth. Unfortunately, fewer of them can take advantage of this option.

Commercial and industrial loans are trending down

Higher interest and tighter credit means fewer loans overall. And that’s exactly what we’re seeing. Loan volume has decreased dramatically over the past year and continues to trend down. We live in a capitalist society, and loans are one of the main sources of capital that finance investment, property deals, equipment purchases and working capital. Loans should not be going down in a growing economy. Businesses borrow to expand and support their growth. Clearly this is going in the opposite direction.

Total business inventories are rising, but non-durable goods orders are falling

Thanks in part to tightening capital, business inventories have increased more than 3.5 percent over the past year. They’re at historically high levels. Meanwhile, orders for non-durable goods (products that last less than three years) have fallen 8.5 percent over the past year. When big businesses are sitting on too much inventory, they don’t need to buy more. When they stop buying, smaller clients who supply them see a fall-off in demand.

You can’t raise interest rates – a core cost of doing business – by more than 20x in just 15 months and not expect it to have an impact. But this impact takes a while. And it’s starting to show up in a constriction of capital and higher financing costs. 

The more than 30 million small firms in this country are starting to feel this pain, and they will continue to see less capital available at higher costs over the coming months.

They know this. That’s in part why their optimism is so low.

Gene Marks is founder of The Marks Group, a small-business consulting firm. He frequently appears on CNBC, Fox Business and MSNBC.