Lending practices set to impact 2023 Minnesota businesses

Inflation has cemented itself at the forefront of economic decisions for communities throughout the country in 2023. Its impact will present an ongoing challenge in Minnesota as well. Rising interest rates have made it difficult for businesses to access the capital necessary for their commercial and residential projects. In the face of tightened lending practices, business leaders must scrutinize their plans for 2023. Understanding where to access affordable financing options will be critical.

“There has been a renewed interest in our low-interest loan programs lately, as rising interest rates and expensive building materials pose a double threat to business expansions and other economic development projects,” said Tom Lambrecht, economic development manager with Great River Energy.

Inflation impacts lending

The annual inflation rate for the United States is 6.5% for the 12 months ended December 2022, according to the U.S. Labor Department data published Jan. 12. As a result, the availability of relatively cheap money for borrowers is certainly in the rearview mirror. Rates at the beginning of 2023 are around 4.25% after varying under 2.5% since 2008. While that rate is historically low compared to that experienced consistently before 2001, the rate of increase is presenting significant challenges to project leaders.

Even though experts predict the Fed will end rate hikes in the spring of 2023 with inflationary pressures lessening, the impact on commercial lending will still be present. 

“As the economy slows, we expect banks to further reduce their exposure to small-business credit, expanding an already sizable void in critical financing for growing small businesses,” said Ben Johnston, Kapitus chief operating officer, in the American City Business Journal, December 2022. “As banks scale back their lending to small businesses, and less-mature alternative lenders struggle to meet demand, small-business owners will have fewer options for financing.”

In December 2022, the Federal Reserve Bank of Kansas City reported small business commercial and industrial lending balance decreased 22.1% year-over-year in the third quarter of 2022. Significant factors were diminishing credit quality and tightening credit standards. 

Venture capital activity has slowed recently as well. PitchBook-NVCA Venture Monitor reported total exit value dropped 90.5% nationwide in 2022 to $71.4 billion, compared to 2021’s record-high of $753.2 billion. Minnesota mirrored that trend, with total deal values falling more than 18% to $2.2 billion and the number of deals declining nearly 16% from 2021. 

Federal reaction

Therefore, 2023 is shaping to be a year in which commercial developers, owners and site selectors must determine if it makes sense to take on more borrowing costs versus the benefits projects bring in the long term. While 2023 performance may not match the past two years, multifamily and industrial remain the favorite asset classes, with many lenders avoiding office and retail. 

In a January 2023 interview for the Minneapolis/St. Paul Business Journal, Eisner Advisory Group LLC’s Chief Executive Officer Charly Weinstein stated he expects a significant pullback in the lending markets and scarcity of credit for companies looking to grow. “Finding financing alternatives is going to be significant,” he said.

The Inflation Reduction Act of 2022 (IRA) has the potential to provide different financing options for businesses. IRA projections indicate more than $1.5 trillion in deficit reductions are possible in 2023, which could ease inflationary pressure in general, with the hopes it would result in a more accommodating economic environment for entrepreneurs and business owners to access the funding they need.

Specific IRA attributes are intended to provide more immediate assistance. Industrial energy projects are one segment the IRA may facilitate positive momentum in 2023. USDA Rural Development will receive funding for new loans, grants or incentives to expand clean energy and transform rural power production. The IRA will provide up to $1 billion for Rural Utilities Service (RUS) loans for renewable energy infrastructure by electric service providers. The IRA requires the agency to forgive up to 50% of the loan amount. Additionally, nearly $10 billion will be designated to RUS toward supporting various alternative energy projects. 

The IRA will also direct funds for Rural Business and Cooperative Service initiatives. Up to $2 billion will go to the Rural Energy for America Program to support renewable energy and energy efficiency projects for more than 41,500 farms and small businesses. An additional approximate $500 million will be made available in grants for infrastructure improvements to blend, store or distribute biofuels.

State momentum

Other positive signs exist for Minnesota borrowers in 2023. Minnesota companies planning infrastructure projects may be more amenable at the state level in 2023. The Minnesota Office of Management and Budget projected a record-setting surplus of nearly $18 billion. As a result, funding projects like the measure to direct $110 million for high-speed infrastructure plans may be more appealing to lawmakers in 2023. 

Great River Energy facilitates numerous assistance programs for its member-owner cooperatives. Its Business Expansion Loan Program is ideal for companies with growth opportunities that require additional gap financing or are looking to lower their overall cost of debt service. The program allows for 80% of a project’s costs to be financed and a 0% interest rate on construction, equipment and other job growth activities. The USDA Rural Economic Development Loan & Grant Program is available to fund projects like business expansions, start-ups, community development and business incubators.

Navigating the financial lending waters will certainly be difficult in 2023. Contact your economic development partners at Great River Energy today for more information.