Big banks and institutional lenders are making more loans to small businesses. But that's not necessarily a good thing.
Big banks, with assets of $10 billion or more, approved nearly 22 percent of loans to small business borrowers, according to Biz2Credit in its April survey. That's up more than two full percentage points compared to April, 2014, and double the amount they approved in April of 2011. Similarly, institutional lenders approved 61 percent of loans in April, an increase of nearly 3 percentage points compared to the same month a year ago. (Biz2Credit has only included institutional lenders as category for the past 12 months.)
Naturally, if the bigger guys turn on the spigots more, that that could signal a greater availability of credit overall--putting you in a better position to get a loan approved. After all, big banks tend to have more money than smaller institutions and can possibly make bigger (or more plentiful) bets. Yet it also means there are fewer sources of loans, according to Biz2Credit. What's more, larger banks have been criticized for their unwillingness to make small loans, typically in the $40,000 to $50,000 range, which entrepreneurs tend to need most.
While typically, smaller banks have filled this gap in the past, Biz2Credit's data suggests these institutions are less likely to do so today. Loans from small banks are essentially flat for the month, increasing a scant tenth of a percentage point compared to March, and down half a percentage point compare to April 2014. The April increase was also the first gain in 12 months, Biz2Credit says.
Similarly, loan approvals from credit unions dropped a tenth of a percentage point to 43 percent, and decreased half a percentage point compared to the same time period a year ago. Meanwhile, loans from alternative lenders who took up much of the slack for loans during the recession when big banks all but pulled out of the market entirely, also fell a tenth of a percentage point month over month for April to 61 percent, and decreased nearly 2 and half percentage points compared to the same month a year ago. (Loan approvals from such lenders peaked in late 2013 at 67 percent and have been dropping ever since.)
"Institutional lenders are becoming mainstream lenders in the small business market and are supplanting cash advance companies among non-bank sources of capital," Rohit Arora, Biz2Credit chief executive said in a press release. One reason they're replacing alternative lenders, including cash advance companies, is that they don't rely on broker networks to make their loans, and hence their loans tend to be cheaper, Arora said.
For their part, smaller banks and credit unions have not made the necessary investments in technology that would allow them to keep pace with fast pace of bank lending to entrepreneurs, Arora added.