Small businesses on the funding search in January found themselves in familiar territory, data from Biz2Credit shows.
According to the Biz2Credit Small Business Lending Index, a monthly analysis of more than 1,000 small business loan applications on the platform, big banks, small banks and credit unions all posted lower approval rates, with credit unions hitting their lowest level since the index was initiated.
Institutional and alternative saw small growth in their approval rates in January.
“The turbulence in the stock market and plummeting oil prices in the last month have resulted in a level of uncertainty for lenders,” Biz2Credit CEO Rohit Arora said. “While the demand for small business loans held up, the approval standards tightened.”
While January’s big bank approval rate of 22.7 percent was a 20 basis point drop from December, it is still a 6.5 percent gain from January 2015.
“Outside economic factors attributed to the drop in loan approvals at big banks last month,” Mr. Arora said. “When there is uncertainty in the market, mainstream lending institutions are less inclined to take risks on loans.”
Small bank approval rates dropped 10 basis points to an even 49 percent in January. If they embrace technology that rate could be higher, Mr. Arora believes.
“Small banks have been slow to adapt to technological innovations to streamline the loan application process, so they are receiving requests from lesser-quality borrowers. This is hindering them from approving more loans,” explained Arora.
Once seen as a having an important role to play in the growth of small businesses, credit unions are also limited by their lukewarm response to technology, Mr. Arora said.
“Credit unions are faltering because of their inability to adapt to technological advancements in the industry. Borrowers seek speed and convenience; many credit unions are lacking in the digital department.”
“This has resulted in a decrease in applications from creditworthy borrowers.”
Institutional lenders have yet to see an approval rate decline since being added to the index in 2014. Their approval rate in January was 62.6 percent.
“Institutional lenders are doing a great job at minimizing the risks of borrowing requests through advanced algorithms,” Mr. Arora said. “In recent months, we are seeing more international funds enter the game seeking higher yields from investments. With growing uncertainty in global emerging markets, I expect this to remain a popular commodity for both investors and borrowers.”
Alternative lender approval rates had been in steady decline as institutional lenders have become a viable option. Still they are approving 60.8 percent of applicants, many of whom use them as a last resort.
“While lending approvals dropped at the mainstream lenders, alternative lenders picked up the slack,” Mr. Arora said. “Alternative lenders typically offer more expensive loan products, so they are often one of the last choices for borrowers.”