Big banks, often criticized by black entrepreneurs seeking financing to start or expand a business, are showing improvement in that crucial lending area.
Approval rates for small business loans from these banks reached 25.2% and 64.3% for institutional lenders in December 2017, the latest Biz2Credit Small Business Lending Index reveals.
The monthly analysis analyzed more than 1,000 small business loan applications on Biz2Credit.com. Institutional lenders include insurance companies, pension funds, and others. The 25.2% rate for big banks was the highest level since online lending began tracking those loans in January 2011 and the peak level since January 2014 for institutional lenders. Those figures were the best lending approval rates for both categories since the last recession.
With the Federal Reserve recently boosting interest rates, low unemployment, and the stock market performing extremely well, Biz2Credit CEO Rohit Arora expects the trend for small business lending to continue trending upward for 2018.
“The economy is performing well on many different levels. Holiday retail sales were up, unemployment remains low, and salaries have gone up a notch,” stated Arora, who headed the research. “Businesses are anticipating that the tax form bill could help them, which gives potential borrowers more confidence to take risks. Meanwhile, lenders are closing deals and interest rates continue to trend upwards, which makes lending more profitable for them.”
For all of 2017, the online lending platform reported small business loan approval rates rose at larger institutions, such as banks and institutional lenders. Small banks approved 49% of the funding requests they received in December, the same percentage for November. For more than three years, regional and community banks have hovered at or around 49%. The last time they topped the half-way point was in October 2014, when approvals came in at 50.2%.
“SBA lending was strong throughout 2017, and small banks are among the most active lending partners,” added Arora, one of the nation’s leading experts in small business finance. “This bodes well as we enter a new year. It is helpful for young entrepreneurs, who might not have credit scores high enough for a traditional bank loan, that SBA-backed loans are available through big banks and smaller ones.”
Loan approval rates among alternative lenders in December dropped two-tenths of a percent to 56.7% after a slight gain in November. Alternative lenders include merchant cash advance companies. But approvals for the category declined every month except November, according to the Biz2Credit Index.
“With many traditional lenders willing to fund small businesses, alternative lenders are getting requests from lower quality borrowers,” Arora explained. “The solid economy makes consumers willing to spend and results in business optimism—especially for companies looking to expand.”
Loan approval rates at credit unions climbed one-tenth of a percent in December of 2017 as they approved 40.4% of loan applications last month. Just two months ago, in October, credit unions had hit a record low point for the category.
“Credit unions have a place in small business lending, but they have lost ground to banks both large and small and institutional lenders, who have become aggressive in the small business lending marketplace,” Arora added. “Banks and institutional lenders are reaping the benefits of incorporating financial technology (FinTech) into their operations. Credit unions lagged behind in technological upgrades, and it has hurt them over the past few years.”