Alternative lenders negatively impacted by higher approval rates at Big Banks
U.S.--Small business loan approval rates at big banks and institutional lenders continue to improve, attaining new post-recession highs in February 2015, according to the 'Biz2Credit Small Business Lending Index', the monthly analysis of 1,000 loan applications on Biz2Credit.com.
Big banks ($10 billion+ in assets) approved 21.5 per cent of small business loan requests in February 2015, up from 21.3 per cent in January. Further, loan approval rates at big banks have increased consistently for 10 out of the last 11 months, and a year-to-year comparison shows that they have increased by 12.5 per cent.
“Big banks are starting to grant more conventional loans. This allows them to keep fixed loan expenses down compared to SBA-backed loans, which are not primarily being done at smaller banks,” explained Biz2Credit CEO Rohit Arora, who oversaw the research. “The investment in digitization at big banks has helped expedite the small business loan approval process.”
Meanwhile, institutional lenders granted 60.7 per cent of funding requests by small business owners in February, an increase from 60.5 per cent in January 2015. Approval rates by institutional lenders have increased each month ever since Biz2Credit began monitoring this category of lenders one year ago.
“Institutional lenders are willing to offer more loans that are financially appealing to small business owners,” Arora said. “The high approval rate in this category of lenders is a reflection of their strong investment in technology advancements, which enables them to quickly assess the risk of default. Thus, they are incredibly efficient; only a miniscule 0.77 percent of loans made by institutional lenders on our platform have defaulted."
For the fourth consecutive month, small banks denied more than half of their loan requests to small business owners, as lending approval rates at small banks remained stagnant at 49.6 per cent in February. After reaching an all-time Index high in May 2014, lending approval rates at small banks have gradually declined.
"Smaller banks are better at offering SBA loans, but those loans take time to process. Creditworthy customers who seek quick funding are turning to other types of funding that take less time to process," said Arora. "This leaves smaller banks with less attractive borrowers than they had a year ago and explains why approval percentages are dropping."
Approval rates at alternative lenders -- merchant cash advance companies, factors, and other non-bank institutions – dropped for the 13th consecutive month to 61.4 per cent in February, from 61.6 per cent in January. Their drop has coincided with the emergence of institutional lenders.
"Alternative lenders have been impacted most by the emergence of institutional players. As the economy continues to improve, small businesses with good credit standing don't have to borrow money at high interest rates often associated with alternative lenders," Arora explained. "Small business owners were often obligated to pay high interest rates during the 'credit crunch' when they were desperate for money. However, this is no longer the case."
Credit unions granted 43.3 per cent of loan applications in January, a slight increase from the record low approval rate of 43.2 per cent in January 2015. However, they are still struggling to increase their presence in the small business finance marketplace.