Big banks and institutional lenders continue to increase the percentage of small business funding requests that they receive. In fact, both categories of lenders reached post-recession highs in January 2015, according to my company's Biz2Credit Small Business Lending Index, the monthly analysis of 1,000 loan applications on Biz2Credit.com.
Big banks ($10 billion+ in assets) approved 21.3% of small business loan requests in January 2015, up from 21.1% in December 2014. They are willing and able to make large loans and still have an interest rate advantage over most of their competitors. Typically, the bigger banks grant loans in excess of $2 million.
Meanwhile, institutional lenders (family funds, hedge funds, and other non-bank institutions) granted 60.5% of funding requests by small business owners in January, an increase from 60.1% in December. Approval rates by institutional lenders have increased each month since Biz2Credit began monitoring this category of lenders one year ago.
Institutional lenders are now making longer term (5-year) loans and giving them in larger amounts--up to $1 million. Their approval rates are higher because the investments they have made in technology enables them to act quickly and minimize risk. Small banks and credit unions are lagging in technological updates.
The overall result is convergence in interest rates. Alternative lenders have had to lower their lending rates because of the emergence of institutional players who are offering the same speed of decision-making at lower costs. While this hurts cash advance companies, it benefits small business borrowers, who get money more quickly and at good rates. There is no reason that small businesses should still be paying 30-50 percent interest at a time when most rates are quite low.
Meanwhile, credit unions are struggling in small business lending. This week, SBA chief Maria Contreras-Sweet announced a partnership with the National Credit Union Administration (NCUA) to expand the accessibility of small-dollar SBA loans from credit unions. It comes at a time when credit union lending to small businesses needs a kick-start.
There are three reasons why credit union lending to small businesses has stalled:
1. The credit union MLB lending cap was never raised (from 12.25% to 27.5%) as many industry leaders had hoped.
2. Credit unions have not kept up with technology to the same extent that big banks and alternative lenders, and institutional lenders have.
3. The competition for small business loan deals has become more and more intense, particularly as the U.S. economy improved.
Biz2Credit's latest figures show that credit unions grant 43.2 percent of loan requests from small companies in January 2015, down slightly from Dec. 2014. The figure represents an all-time low since my firm began examining small business loan approval rates in January 2011. The high mark for credit unions came in March 2012 when the figure was 57.9 percent.
To view the historic chart of the Biz2Credit Small Business Lending Index, click here.