As the economy continues to jolt back to life, big banks and institutional lenders are opening the spigots to lend more to small businesses. It's smaller banks that are being left out in the cold.

That's the latest news from alternative lender Biz2Credit, whose December report on small-business lending, out Tuesday, shows increasing demand from small businesses for financing.

"When big banks start getting more aggressive [with small-business lending], small banks lose out," says Rohit Arora, chief executive of Biz2Credit.

Bigger lenders tend to have greater brand recognition and larger distribution networks than their smaller peers, so if they want to get your attention, they will. Plus, over the last year, larger financial institutions have made significant investments in loan technology that cuts down on paperwork and loan approval time.

For December, big banks with assets of $10 billion or more approved 21 percent of loans, compared to 17.6 percent in December 2013. That's still about half the approval rate of big banks prior to the financial crisis, Arora says.

Nevertheless, it's institutional investors--consisting of pension funds, family offices, and bank credit facilities--that are really leading the way. Biz2Credit began allowing institutional investors into its lending pipeline a year ago.

"The institutional guys are looking for higher yield, particularly after the Lending Club IPO," Arora says. "This asset class is becoming pretty mainstream."

Whereas institutional investors typically had to buy small business loans on the secondary market in the past, they can now do so more quickly, directly, and easily via a variety of online lending marketplaces. (Another small business lending site that recently went public is OnDeck Capital, an Inc. 5000 company.)

Collectively, institutional investors approved more than 60 percent of small-business loans in December, compared to 56.5 percent of loans in January 2013.

For their part, smaller banks--defined as those with less than $10 billion in assets--continued to turn away small-business borrowers. They approved less than half of loans, or 49.7 percent, in December, a 2 percentage point decrease in activity compared to a year ago.

And the trend is likely to continue for smaller banks into 2015, notes Arora. "Big banks will gain more market share at the expense of smaller banks, as interest rates go up and the cost of loans increases."

Published on: Jan 13, 2015