With the rise of alternative business lenders, small business owners have never had so many types of lenders available to provide capital for growth. Aspiring entrepreneurs have always looked to family and friends to help finance new and growing businesses or have found investors for equity financing. Local banks, naturally, have long been a primary source of small business loans.
About 10 years ago, online platforms such as Biz2Credit and other online, alternative business lenders made multiple sources of funding available to small and medium-sized businesses through the use of technology. Borrowers no longer had to visit multiple banks and fill out mountains of paperwork with little guarantee of success. There was no way for the borrowers to know the approval parameters of lenders.
Digitizing the small business loan application process enabled small business owners to find funding sources they otherwise would have never known about. Little did they realize how many different types of lenders were ready and willing to lend – even during the so-called “credit crunch.” Banks of all sizes, credit unions, alternative lenders, such as factors and cash advance companies. Eventually, institutional lenders including pension funds and family funds got into the game. They have become important players in small business lending.
The August 2017 Biz2Credit Small Business Lending Index™, a monthly examination of more than 1,000 small business loan applications on Biz2Credit.com. It found that loan approval rates of institutional investors continue to climb. Last month, they granted 63.9% of funding requests. Their rates and terms are usually more reasonable than those of alternative lenders such as factors, accounts receivable funders and cash advance companies.
Alternative business lenders had their heyday during the credit crunch, when traditional banks turned off the spigot of small business lending. Non-bank lenders approve more than 57% of funding requests on the Biz2Credit platform. For companies that have less than stellar credit, they are willing lenders, albeit at high interest rates. As the economy recovered and small business owners’ financial positions improved, borrowers were no longer desperate for expensive money. Competition from banks returned.
Banks are processing billions of dollars’ worth of SBA 7(a) and 504 loans, which are backed but not funded by the Small Business Administration. Thanks to SBA lending, regional and community banks are granting almost half of the loan requests (49%) they receive. At times in the past decade, they have crossed the 50% benchmark.
Big banks are now approving almost a quarter of their loan applications. This is a solid number, and a good sign for small business borrowers.
Lastly, credit unions are still a source of small business funding, but they are fewer in number than banks. They are handcuffed by the credit union member business-lending (MBL) cap that has not risen above 12.25% of assets. However, credit unions approved 40.3% in August. The figure is a new low for credit unions on Biz2Credit’s index, but they do remain a viable funding source.