While alternative lenders – like the web-based peer-to-peer enterprises – have been getting a lot of attention in the media, it’s the large banks that are really making small business lending “news” right now.
Big bank loan approval rates to small businesses hit an all-time high in the June 2017 Biz2credit Small Business Lending Index. It jumped 0.2 percent over May, bringing it to 24.3 percent. This makes the eighth time over the last year that big bank loan approval rates have increased.
By contrast, June loan approval rates at alternative lenders dropped by the same amount, 0.2 percent. Further they are more than 2 percent below where they were during June 2016.
Rohit Arora, Biz2Credit CEO, explained the situation saying, “Approval percentages at big banks and institutional investors are at post-recession highs. The result is that alternative lenders get requests from less creditworthy borrowers. These are riskier deals.”
Further, the recent Fed policy of gradually increasing interest rates is making it more attractive for big banks to lend.
“For the third consecutive quarter, the Federal Reserve has voted to increase its benchmark interest rate to a range between 1 percent and 1.25 percent in a vote of confidence in the economy. This bodes well for big banks,” Arora said.
“The interest rate increases are resulting in more profitable deals for big banks. This is incentivizing these mainstream lending institutions to approve a higher percentage of loan requests,” he added.
Credit union loan approval rates inched lower 0.1 percent to 40.4 percent, a rate that’s down a little over 1 percent from the same time in 2016. However, according to Arora, interest rates aren’t dampening approvals at credit unions – it’s the pace and style of business today that’s leaving them in the dust.
“In the FinTech era, credit unions have fallen behind because other categories of lenders have embraced technology. In the process, they lowered their risk, while many credit unions have remained somewhat old fashioned,” he said.
“Credit unions typically process loan requests at a slower rate, and in today’s fast-paced economy, borrowers simply aren’t willing to wait. Credit unions are becoming less relevant in small business lending,” Arora explained.
You can check out the full report on the Biz2credit website.