Small business lending may currently be at its highest point this century. The overall strong economy and relatively low interest rates are important factors. However, looking at the categories of lenders themselves, they each are strong players in small business finance for different reasons.
Big Banks are approving loans at a higher rate
Loan approval percentages again rose at big banks ($10 billion+ in assets) in April. More than one-quarter (25.7 percent) of small business funding requests were granted, continuing a prolonged upswing that has been in effect for the past few years. Since the start of the Biz2Credit Small Business Lending Index™ in January 2011, loan approvals have never been higher. Combine this fact with optimism in the economy and interest rates that are still quite reasonable, and we have a perfect storm for small business lending.
This is good news for both borrowers and lenders. Access to capital is the lifeblood of any small business. Big banks, which typically offer the lowest interest rates and the best term lengths, are indeed active in the current credit marketplace. The steady hikes in interest rates by the Federal Reserve makes small business loan-making increasingly profitable. A small rate hike translates into tens of millions of dollars in profits for large banks like Citibank and others – especially since the cost of capital has not changed. Big banks have a larger deposit base, and they can be more aggressive in lending, especially in a strong economy.
Small Banks are processing SBA Loans
Regional and community banks also are a solid source of capital for entrepreneurs. In April, they approved 49.2% of the financing requests they received, an increase of two-tenths of a percent from March. Small banks are particularly active in processing SBA loans, which mitigate risks for lenders, thereby making it more attractive for them to lend to startups and entrepreneurs who may not have a long history of timely credit payments.
Institutional Investors have become increasingly active in small business lending
Institutional lenders – pension funds, insurance companies, family funds, and other non-bank lenders – reached yet another Small Business Lending Index record of 64.6 percent, up one-tenth of a percent from March. These funders are becoming increasingly active players in small business lending. Thanks to improved data analytics, the risks of default have never been lower. Additionally, institutional lenders offer relatively low interest rates and terms.
Alternative Lenders are providing capital for companies with less than stellar credit ratings
Although loan approval rates among alternative lenders dropped one tenth of a percent to 56.4 percent in April, these non-bank lenders enable companies with poor credit scores to obtain capital. Because they are willing to fund firms that do not qualify for traditional bank loans, they charge higher interest rates. The positive news is that alternative lenders grant more than half of requests. While the cost of capital may quite high, in a cash crunch, alternative lenders are willing to provide funding when others will not do so.
Credit unions are another source of small business finance. They approved 40.2 percent of loan applications in April, a one-tenth of a percent gain from March, which had set a record low for the Biz2Credit Small Business Lending Index. Credit unions are having a tough time competing against bigger players, including banks and institutional lenders which have invested heavily in building their digital application capabilities.
For the analysis, Biz2Credit analyzed loan requests ranging from $25,000 to $3 million from companies in business more than two years with an average credit score above 680. Unlike other surveys, the results are based on primary data submitted by more than 1,000 small business owners who applied for funding online.
