Government Shutdown Halts Small Business Lending: Biz2Credit Small Business Lending Index for Oct. 2013 Reports Significant Drop in Loan Approval Rates at Banks
Small Bank Approval Rates Fall Below 50%, Alternative Lending Thrived as Borrowers Scrambled for Capital in October
NEW YORK, NY, November 12, 2013 - The government shutdown in October had a significant negative impact on small business lending, according to the Biz2Credit Small Business Lending Index, a monthly analysis of 1,000 loan applications on Biz2Credit.com.
Small business loan approvals at big banks ($10 billion+ in assets) dropped to 14.3% in October 2013, which is nearly 20 percent lower than its loan approval rates of 17.5% in September 2013. Additionally, loan approval rates at small banks dropped from 50.1% in September to 44.3%, which marks the lowest approval rate since August 2011.
Further, credit unions, which had been on the lending rebound prior to the government shutdown, experienced a 4% decrease in approval rates in October 2013. Lending approval rates at credit unions fell to an all-time Index low of 43.4% in October from 45.40% in September.
"SBA loan approvals stalled because the agency was not working for three weeks. Similarly, non-SBA could not be processed during the government shutdown because the IRS was shut down," said Biz2Credit CEO, Rohit Arora who oversaw the research.
"Banks could not acquire income verification from the IRS during the shutdown, which is needed to approve many loan requests," continued Arora, one of the nation's top experts in small business finance. "A major backlog of SBA loans from the shutdown will take months to process, and the debt ceiling debate could negatively impact small business lending even further in the coming months."
Meanwhile, alternative lenders seized the opportunity and picked up the slack in small business lending. Approval rates by alternative lenders increased to an Index high 67.3% in October 2013, up from 63.2% the previous month.
"Small business owners were desperate for capital during the shutdown and turned to alternative lenders, who were willing and able to provide money, but at a much higher interest rate than a bank or credit union would charge," explained Arora. "The stop in the flow of capital came at a time of year when small businesses traditionally search for funding. The economy, which is still in the weak recovery phase, simply cannot sustain this kind of disruption."
Arora expects that funding approval rates will climb in November as the banking industry recovers from the shockwave of the government shutdown.
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