Biz2Credit Small Business Lending Index for Jan. 2014 Reports New High Approval Rates at Big and Small Banks
Institutional Lenders, a New Category of the Biz2Credit Index, Increasingly Seeking Small Business Lending Deals
Small business loan approval rates at big banks ($10 billion+ in assets) increased to a new high of 17.8% in January 2014, up from 17.6% in December 2013, according to the Biz2Credit Small Business Lending Index, a monthly analysis of 1,000 loan applications on Biz2Credit.com. In a year- to- year comparison, lending approval rates at big banks have increased more than 15 percent.
"Increasingly, creditworthy borrowers are applying for small business loans at big banks and having them approved," explained Arora, one of the nation's leading experts in small business lending. "Big banks, which request proof of three years of profitability, are now receiving applications from companies whose fortunes increased from 2011- 2013."
Small business loan approvals at small banks reached a new benchmark of 50.9% in January 2014, up from 48.7% in the previous month. While lending approval rates at small banks are up by 2 percent in a year- to- year comparison.
"SBA lending has picked up considerably over the last month," said Biz2Credit CEO Rohit Arora, who oversaw the research. "The increase in popularity over the last month in SBA lending accounts for the rise in approval rates at small banks, which rely heavily on the SBA Express program (loans less than $350,000) and SBA 7(a) program (loans between $350,000 - $5 million)."
Meanwhile, credit unions experienced a drop in small business approval rates in January, thereby continuing their slide. Approval rates at credit unions dipped to an all- time low of 43.4% in January from 43.9% in November. Further, lending approval rates by credit unions has declined in 16 of the last 20 months and is down nearly 25 percent in that 20- month period.
Alternative lenders,which emerged as important players in small business lending in 2013, experienced a drop-off in approval rates from 67.3% in December to 64.1% in January 2014. Alternative lenders had been the biggest benefactors of the government shutdown last October.
"What we may be seeing is a return to normalcy for alternative lenders. While they offer speed in their decision-making, alternative lenders charge higher rates than others," said Arora. "As banks have become more aggressive in small business lending, the higher quality borrowers seem to be going to them."
Institutional Lenders, a new category in the Biz2Credit Small Business Lending Index, approved 56.5% of the funding requests they received. This category of lenders includes credit funds, insurance companies, family funds, and other yield-hungry, non-bank financial institutions that typically offer more competitively priced loan options than alternative lenders in amounts up to $1 million.
"Institutional investors have emerged in small business lending and offer interest rates that generally fall somewhere between the rates offered by banks (around 6%) and alternative lenders that charge up to 30-50%," Arora said. "As more institutional lenders come into the marketplace, it provides greater amounts of long-term, stable money to the marketplace. Borrowers can get better products at attractive interest rates and terms."
In the last 3-4 months, Biz2Credit has processed over $20 million in small business financing from institutional lenders.
"The demand for short-term, high-interest financing will go down, and institutional lenders will fill that void," added Arora, who expects this category to grow as the economic conditions continue to improve.
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