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Fresh data from the U.S. Census Bureau indicates a three-year-old boom in small business formation may be losing some of its steam. 

According to the Census Bureau’s Monthly Business Formation Report, released Monday, there were approximately 473,000 startup applications filed in October. While the overall number was level with September’s result, the number of so-called high-propensity applications — defined as those likely to result in businesses that create jobs — fell 3.3% month-over-month to 154,200.

Any long-term falloff in startup activity would be problematic for banks and credit unions, given the importance small business plays in their operations. “Small businesses are highly dependent on bank loans since they lack access to broader capital markets,” Thomas Hogan, an economist and senior fellow at the American Institute for Economic Research, wrote Tuesday in a statement to American Banker.  

Lenders who responded to American Banker’s recently released 2023 Small Business Banking survey expressed optimism about the small business space, with 59% signaling an intent to boost lending. 

Those sentiments weren’t necessarily misplaced. Despite the hiccup involving October high-propensity applications, startup numbers for 2023 remain positive. Overall applications through October totaled 4.6 million, an increase of 7% over the first 10 months of 2022. Similarly, high-propensity applications through October totaled 1.48 million, up 7% from the first 10 months of 2022.

Startup activity, moreover, remains significantly elevated over pre-pandemic levels. Total applications for all of 2018 were 3.5 million, compared to 5.1 million for full-year 2022.

Small business applications spiked in 2020 due in part to pandemic spending by the federal government. The high-levels of startup activity continued in 2021 and 2022, with applications totaling 10.5 million, the highest two-year figure in U.S. history, according to the Small Business Administration. 

Still, some observers are forecasting a slowdown in the pace of startup formation, citing factors such as inflation and higher interest rates.

“With the rapid rise in rates back to their natural level, there is absolutely going to be a slowdown in job creation and startups from the levels we’ve seen the past few years,” Vijay Marolia, managing partner and chief investment officer at Regal Point Capital in Orlando, Florida, said Tuesday in an interview.  

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Patrick Reily, cofounder of Toronto-based Uplinq, a credit assessment and scoring platform for small business lenders, termed the October Monthly Business Formation Report an “inflection point.” Reily noted Tuesday in a statement to American Banker that some individual states have begun to experience year-over-year declines in startup activity, even as the national figure continues to reflect an increase. 

According to Reily, higher-for-longer interest rates along with high inflation are cutting into cash reserves while elevating credit-card borrowing, trends that make it tougher for individuals to act on their startup dreams. At the same time, distress among existing businesses has risen substantially in the past year. 

“As we can now see, the thrill is gone,” Reily wrote. “Young and inexperienced business owners are quickly learning the challenge of crafting a successful business.” 

Higher interest rates have slowed lending, “which will likely put a drag on business formation going into 2024,” according to Hogan.  

There could be a silver lining, but it depends on whether the Federal Reserve is able to avoid recession and engineer a soft landing for the economy, Hogan, the former chief economist for the Senate Committee on Banking, Housing and Urban Affairs, added. “Most economists wrongly predicted a recession in 2023. A continued boom in 2024, for new businesses and the economy, is not out of the question,” Hogan wrote.