It's not only big banks that are seeking to make more small business loans, institutional investors are too. 

Wait a minute, institutional investors, such as pension and teacher retirment funds? That's right. They make loans to small buisnesses.

I didn't know that either, but buried in Biz2Credit's monthly survey data on small business lending through its platform, it turns out that they are currently among the most active lenders. They join big banks as two of the fastest-growing sources for capital in 2014. 

Here are the details:

Big banks, with assets of $10 billion or more, approved just over 20 percent of loans in July, continuing a steady ramp up since July 2013, when they approved 17.4 percent of loans. By contrast, smaller bank approval rates, at about 51 percent, are not much changed year over year, when approvals were 49.4 percent in July 2013.

Biz2Credit also included data for the first time from its institutional loan clients, which includes family offices, credit funds, endowments, pension funds, and insurance company funds, according to Rohit Arora, chief executive of Biz2Credit.

Biz2Credit started allowing institutional investors to make loans through its lending platform about a year ago. It turns out they've approved 59.3 percent of loans, compared to 56.5 percent of loans in January, the first month for which Biz2Credit provided data on these lenders. Their current loan rate is about $35 million a month, and Arora says he expects that dollar amount to jump to around $80 million by the end of the year.

The loans are different from other higher interest loans, like merchant cash advances, which small businesses sought more frequently during the depths of the financial crisis, Arora says. While those loans typically have very high periodic interest rates, on the order of 35 percent to 150 percent, institutional investor loans typically range between 7 percent and 13 percent.

"[Institutional investors] are not keen to invest money at a high cost to end cusotmers, because there is a reputational risk," Arora says.

These loans are also for higher amounts, and repayment is over longer periods of time--the loans can range from $50,000 to $1 million and repayment typically extends from one to three years. They can also be refinanced to even cheaper bank loans via the platform after about six months, Arora says.

In some ways, institutional investors are following venture capital firms, which have used lending platforms for small business financing for some time. 

Biz2Credit's take on big bank financing for small businesses stands in dramatic contrast to the recent Harvard Business School report, authored by former Small Business Administration head Karen Mills, which decries the rapid disappearance of big bank lenders from the small business lending market. 

Published on: Aug 5, 2014