Weeks after the collapse of two big banks, small business owners are feeling the pinch.

Bank lending has dropped sharply since the failures of Silicon Valley and Signature Banks. That not only hits businesses. It also threatens a further slowdown in economic growth while raising the risk of recession.

Credit, after all, is the grease that helps keep the wheels of the economy spinning. When credit gets harder to come by, businesses start to squeak.

Take Kryson Bratton, owner of Piper Whitney Construction in Houston.

"Everybody is, I think, very gun-shy," Bratton says. "We've got the R-word — recession — floating around and sometimes it feels like the purse strings get tighter."

Bratton has been trying to get financing for a Bobcat tractor and an IMER mixing machine to expand her business installing driveways and soft playground surfaces.

But banks have been reluctant to lend her money.

"It's not just me," she says. "Other small businesses are struggling with the same thing. They can't get the funds to grow, to hire, to buy the equipment that they need."

Missed opportunities

Tight-fisted lenders are also weighing on Liz Southers, who runs a commercial insulation business in South Florida.

Her husband and his brother do most of the installing, while she handles marketing and business development.

"There's no shortage of work," Southers says. "The construction industry is not slowing down. If we could just get out there a little more and hire more people, we would just have so much more opportunity."

Southers says it often takes a month or longer to get paid for a job, while she has to pay her employees every week. If she had a line of credit to cover that gap, she could hire more people and take on more work. But while her bank has been encouraging, she hasn't been able to secure any financing.

"They're like, 'Your numbers are incredible.'" Southers says. "But they're like, 'You guys are still pretty new and we're very risk averse.'"

Caution overkill?

Even before the two banks failed last month, it was already more costly to borrow money as a result of the Federal Reserve's aggressive interest rate hikes.

Other lenders are now getting even stingier, spooked by the bank runs that brought down Silicon Valley Bank and Signature Bank.

The Federal Reserve Bank of Dallas surveyed 71 banks late last month, and found a significant drop in lending. Weekly loan data gathered by the Federal Reserve also shows a sharp pullback in credit.

Alex Cates has a business account and a line of credit with a bank in Huntington Beach, Calif.

"We've got a great relationship with our bank," Cates says. "Randy is our banker."

Cates decided to check in with Randy after the collapse of Silicon Valley Bank to make sure the money he keeps on deposit — up to $3 million to cover payroll for 85 employees — is secure.

Randy assured him the money is safe, but added Cates was lucky he renewed his line of credit last fall. If he were trying to renew it in today's, more conservative climate, Randy warned he might be denied.

"Just because you're only a 2-and-a-half-year-old, almost 3-year-old business that presents a risk," Cates says.

As a depositor, Cates is grateful that the bank is extra careful with his money. But as a businessperson who depends on credit, that banker's caution seems like overkill.

"It's a Catch-22," he says. "I've got $3 million in deposits and you're telling me my credit's no good? We've never missed a payment. They have complete transparency into what we spend our money on. But now all of a sudden, we could have been looked at as an untenable risk."

The broader impact is hard to predict

As banks cut back on loans, it acts like a brake on the broader economy. That could help the Federal Reserve in its effort to bring down inflation. But the ripple effects are hard to predict.

"You want the economy to cool. You want inflation to come back towards the 2% target. But this is a profoundly disorderly way to do it," says Joe Brusuelas, chief economist at RSM.

And lenders aren't the only ones who are getting nervous. Bratton, the Houston contractor, has her own concerns about borrowing money in an uncertain economy.

"Even though I would love to have an extended line of credit, I also have to look at my books and say how much can I stomach sticking my neck out," she says. "I don't want to be stuck holding a bag if things flip on a dime."

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