By most measures, the U.S. economy is humming along and has gotten a “Trump Bump.” The stock markets have continuously broken records over the past 12 months, retail sales were up during the holiday season, unemployment is low, and salaries have gone up.
Combine these factors with anticipation that the tax form bill could help small businesses, and the result is that borrowers have increased confidence to take risks. Meanwhile, thanks to rising interest rates, banks and other lenders are funding ventures. Business loan approval rates for big banks (25.2 percent) and institutional lenders (64.3 percent) hit new heights in December, according to the latest Biz2Credit Small Business Lending Index™.
Small business loan approval rates climbed at larger funders (banks with more than $10 billion in assets and deep-pocketed institutional lenders) throughout the past year, while small banks granted slightly less than half (49 percent) of the funding requests they received. The performance of regional and community banks has been stable since October 2014, when approvals were at 50.2 percent. Since then, the figure has hovered at or around 49 percent.
Borrowers have benefited from competition in the marketplace. Because of the rise of FinTech, there are more options for small business borrowers than ever before. The internet has helped connect borrowers and lenders more efficiently than ever before. For instance, a doctor’s office in Brooklyn can secure capital from a California-based bank through an online platform, such as Biz2Credit. This would have been unlikely before the financial technology firms disrupted small business lending forever.
At the same time, the Small Business Administration (SBA) continues its mission to support new companies by providing government guarantees to its lending partners. Often the beneficiaries are minority-owned firms and women-owned businesses.
Young entrepreneurs, who many times do not have good credit scores, are much better able to secure financing through an SBA-backed loans. This funding is available via big banks and regional and community banks. In 2017, the SBA backed more government-guaranteed funding to small businesses than ever before. This pattern is unlikely to change in 2018.
Alternative (“non-bank”) lenders approved 56.7 percent of loan requests, a small uptick in December. It is important to note that approvals for the category declined every month in 2017 except for November. As traditional lenders have become more and more willing to finance small businesses, alternative lenders are often left with requests from lower quality borrowers with poor credit histories. Entrepreneurs with decent credit scores are having better luck with banks and are avoiding more costly options, such as merchant cash advance companies, which often charge 25 to 30 percent interest.
Why go for higher cost options when better deals can be had?
Credit unions are still active in the game, but have lost much ground in small business lending. In December 2017, they approved 40.4 percent of the loan applications submitted by small business owners. Earlier in the year, the approval percentages at credit unions hit a record low point for the Biz2Credit Small Business Lending Index, which has tracked loan approvals since 2011, the height of the post-recession “credit crunch”.
Credit unions lost market share to banks, which have become more active in small business lending, as well as institutional lenders, the newest players in the marketplace. According to NAFCU (National Association of Federally-Insured Credit Unions) credit unions are still handcuffed by the lending cap, even though they have the capital to help America’s small businesses thrive.
Due to the outdated member business lending cap, their (credit union) ability to help stimulate the economy by providing credit to small businesses is hampered. – NAFCU
The industry association has been vocal in trying to raise the member lending cap from 12.25 percent of a credit union’s total assets to 27.5 percent of total assets. Thus far, the efforts have been unsuccessful.
Meanwhile, banks and institutional lenders have gained the upper hand also because they have invested significantly into incorporating financial technology (FinTech) into their operations. Many credit unions have not kept up with advances in technology, and this fact has hurt them in the past decade.
Small businesses in search of startup capital and funding for expansion should be able to find what they need in 2018. With a pro-business Trump Administration in the Oval Office and a strong economy, the current economic climate is very positive for small business borrowers. The key thing is to start and complete the loan application process. One of the main reasons that loan applications get rejected is because the borrower has not answered all the questions or been able to produce the appropriate documentation, including tax returns.
Anyone applying for small business loans now will still be able to use their 2016 tax returns as their latest documentation. After April 15, lenders will expect to see the 2017 tax returns. If your company did better last year than in 2016, there is no issue. However, if 2016 was a better year, my advice is to work on getting the application into potential lenders before the 2018 tax deadline.