Small business loan approval rates at big banks and institutional lenders continue climb, reaching post-recession highs in April 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 21.7% of small business loan requests in April 2015, up from 21.6% in March. Moreover, big banks' loan approval rates have improved for six consecutive months and in 12 of the last 13 months. Now that 2014 tax returns have been filed, it is evident that the economy is doing better. Big banks are more willing to grant larger loans to business owners that have a track record of proven success.
Meanwhile, institutional lenders are disrupting the entire small business lending space. Last month, they approved 61.1% of funding requests by small business owners, up from 60.9% in March. Approval rates have increased each month ever since Biz2Credit began monitoring this category in January 2014.
Without question, institutional lenders (hedge funds, insurance companies, family funds, and others) are taking deals away from banks. They can make funding decisions quicker because of their investments in technology and aren't handcuffed by regulations as banks are. The lower interest rates they offer and their longer terms provide a huge an advantage over cash advance companies. Biz2Credit's default rate is less than 1% for institutional lenders on our marketplace platform. Essentially, marketplace lending is providing high reward for relatively little risk. This is truly good news.
Meanwhile, since non-bank lenders, such as cash advance companies, charge a premium rate of up to 40-50% interest, the laws of economics dictate eventually a lower price competitor will steal market share. We have seen this happen to cash advance companies, and the trend is continuing. Interestingly, the institutional players, which make deals happen faster through electronic marketplaces, are now attracting high quality borrowers that otherwise would have gotten traditional bank loans.
When bank lending to small business essentially shut down during the recession, others filled the void. Banking institutions sat back while scrappy little firms ate their lunch. Now, borrowers have learned to feel comfortable with the notion of non-bank lending. The banks opened the door, and the competitors stormed through.
To view the historic chart of the Biz2Credit Small Business Lending Index, including the history of marketplace lending, visit https://www.biz2credit.com/small-business-lending-index/april-2015.