Not long ago, small-business owners found it nearly impossible to receive a business loan from a big bank. These days, big banks are approving more than one-in-five funding requests from small-business owners, which is more than twice as many approvals than they were granting at the end of 2011.
According to my company's Biz2Credit Small Business Lending Index, a monthly analysis of 1,000 loan applications on Biz2Credit.com, big banks (those with $10 billion or more in assets) approved 21.5 percent of small business loan requests in February 2015, up from 21.3 percent in January. Loan approval rates at big banks have increased in 10 out of the last 11 months.
A main reason is that big banks are investing in digitization. Allowing for online small business loan applications has streamlined the process, which enables entrepreneurs to get the funding they need more quickly. Secondly, as the economy has slowly but steadily improved, creditworthy borrowers are applying for loans to expand, replace equipment, or make capital improvements. They are taking on projects that they had held off during the recession and are growing their businesses. Thirdly, big banks are now processing more conventional (non-SBA) loans, which allows them to keep fixed loan expenses down and complete deals more quickly.
Meanwhile, institutional lenders (family funds, hedge funds, insurance companies, and other non-bank institutions) have quickly emerged as strong players in the small business credit marketplace. They granted 60.7 percent of funding requests in February, an increase from 60.5 percent in January. Approval rates by institutional lenders have increased each month since Biz2Credit began monitoring this category just over one year ago. The growth of institutional lenders is a reflection of their strong investment in technology that enables them to quickly assess the risk of default. Only a miniscule 0.77 percent of loans made by institutional lenders made through Biz2Credit.com have defaulted.
These developments have affected alternative lenders, such as cash advance companies, which came strongly on the scene when banks refused to lend during the so-called "credit crunch." Because small-business owners were desperate for money, they were willing to pay high interest rates of up to 30 to 50 percent. As the lending climate improved, borrowers became unwilling to agree to such deals. Thus, alternative lending figures have dropped for 13 consecutive months.
The aggressiveness of big banks and institutional lenders in small-business finance is eating into the market share of small banks. However, they still play an important role as a source for SBA loans, which have attractive interest rates but take a long time to process. Lending approval rates at small banks have dropped from 51.4 percent to 49.6 percent in a year's time, but companies that can afford to take a little more time are indeed able to secure deals with smaller banks. Overall, it is a good time for borrowers to secure money for small-business growth.