Why Big Banks Are Suddenly Interested in Talking to You Again
After years of turning away small-business borrowers, the country's largest banks are now granting one out of five loan applications they receive. The 20 percent benchmark represents a post-recession high for big banks (assets of $10B+). Further, small banks have been approving more than half of the funding requests they receive.
It seems like a long time ago now, but in June 2011, small-business lending at big banks dropped to its lowest levels. At that time, only about one in ten loan applications were awarded funding. We started my company's Biz2Credit Small Business Lending Index to track traditional bank lending approval rates for small business loans on a monthly basis. What we discovered--and had the numbers to back it up--was that banks were frequently denying small business loan requests from their own customers. Prior to that, an entrepreneur was pretty much assured he could get some funding, particularly if he or she had a business account with the bank.
Fortunately, small business lending has become a much higher priority for bank underwriters. To me, this is a sign of the continued slow but steady improvement of the U.S. economy overall, confidence among small business owners that they will be able to repay any funds that they borrow, and the availability and wide access to SBA lending.
During the worst days of the Great Recession--when about 90 percent of loan requests were denied--small business owners shied away from applying for loans. Consumers were not spending, and businesses were not growing. The underlying assumption was. 'Why waste the time when they are not going to give me a loan anyway?'.
The high rate of refusal at traditional banks thereby opened the opportunity for so-called "alternative lenders" to fill the void. The problem was that they charged interest rates of 30 to 50 percent, which is a steep price to pay and resulted in some small business owners getting caught on a treadmill in which much of their revenue was turned over to the lenders. However, desperate times call for desperate measures, and if entrepreneurs were in a situation in which they needed quick money or a significant sum, they were able to get it from alternative lenders.
Fortunately, as things have improved, banks have reentered the lending space. As borrowers' tax returns began to show better results in the calendar years of 2011-13, big banks loan approvals climbed significantly from about 9 percent in June 2011. The silver lining was that companies learned to run "lean and mean" during the recession and then were able to squeeze out more profits when good times began to return.
I speak with dozens of small business owners each week. The sense I get is that they are confident that now is as good a time to borrow money as ever before. Banks seem willing and interest rates are still low. Entrepreneurs are taking the funding and using it to purchase businesses, expand existing ones, buy buildings and replace equipment. Essentially, they are willing to take on higher levels of risk, in part, because of the rise of SBA lending in which the agency provides 75 percent guarantees to lending institutions and waives some of it fees (thus making small business lending more attractive for the banks that process SBA funding.)
The new head of the SBA, Maria Contreras-Sweet, has pledged to streamline the application process by better incorporating technological upgrades such as the acceptance of electronic loan applications and eSignatures.
These are all good signs for the U.S. economy, particularly since small companies create an estimated two-thirds of new jobs in the private sector.
ROHIT ARORA | Columnist
Rohit Arora is the CEO and co-founder of Biz2Credit. He holds a MBA in International Finance from Columbia Business School and co-authored Beyond Cost Reduction: The Risks and Rewards of Global Service Sourcing, a research report funded by the Alfred Sloan Foundation and the Chazen Institute of International Business.