Big banks and other institutional lenders are approving a greater percentage of small business loan requests than at any post-recession point, Biz2Credit’s December Small Business Lending Index found.
The company reviewed 1,000 small business financing applications for a one-year period. It concluded a healing economy is reflected in higher approval rates at big banks and institutional lenders.
Small banks, whose approval rates had fluctuated throughout 2015, finished the year with higher approvals. Credit unions and alternative lenders bucked the trend by approving fewer applications.
Rohit Arora, Biz2Credit’s CEO, said December institutional lending approval rates edged up to 62.5 per cent from 62.4 per cent in November as institutions sought higher yields.
“Institutional lenders have reduced the risks on these types of investments through digital algorithms that have automated the loan approval process and global investments are becoming more mainstream,” Arora explained.
“With the weakening of emerging markets and strong value of the U.S. dollar, we are anticipating more international funds to enter the small business finance mix.”
Big banks, defined as those with a minimum of $10 billion in assets, also saw their approval rates increase 10 basis points at year-end, though, at 22.9 percent it remained quite low. Arora expects those rates to keep heading north as 2016 progresses.
“The big banks have maintained their aggressive approach to lending to small businesses and with the adoption of the Federal Reserve’s interest rate hike, I expect they will be even hungrier to grant loan requests. The adoption of technological advancements on the digital platforms of big banks has streamlined the loan application process and has resulted in lower chances of loans defaulting, thus increasing profitability and a higher volume of loan approvals.”
Small bank approval rates are closing in on 50 per cent after improving 20 basis points to 49.1 per cent in December.
Says Arora, “Small banks are approving more small business loans under the SBA loan program, which reduces the risk assumed by lenders. These are low-risk, low-reward types of loans and have resulted in the increase in loan approvals over the last month.”
At first glance, the 60.7 per cent alternative lender approval rate seems decent, but it has steadily declined for the two years institutional lenders have been active in the space. The current approval rate is the sector’s lowest since August of 2011.
“Alternative lenders are under increased pressure to offer financial products at lower prices,” Arora suggested. “They’ve struggled to adapt and this has translated to the gradual decline in loan approval rates.”
Credit unions registered their lowest approval rate since the index was introduced. It is 42.3 per cent.