Alternative Lending Still on the Decline for SMEs

Following a long winter, small business lending continues to thaw. March figures show approval rates are improving—reaching new heights, according to the Biz2Credit Small Business Lending Index.

Big banks and institutional lenders lead the way in approvals. Institutional lenders approved the lion’s share of new loans, granting 60.9 percent of small business funding requests last month. March saw a slight increase from February’s approval rate of 60.7 percent. Institutional lenders could be considered the powerhouse of small business lending. The percentage of approvals by these lenders has increased every month since Biz2Credit began monitoring them one year ago.

Biz2Credit CEO Rohit Arora believes the strength of institutional lending is supported by the online platform the company provides. “Institutional lenders are willing to offer attractive loans to small business owners,” Arora said of the March results. “Our Biz2Credit platform enables them to buy small business loans as a solid investment with miniscule risk. Less than 1 percent of loans on our institutional platform have defaulted since January 2014.”

Banks with more than $10 billion in assets approved nearly a quarter of loan requests, a small increase over the previous month. Like institutional lenders, big banks have increased their lending month-over-month for the past 12 months. According to historical Biz2Credit Small Business Lending Index results, following a small dip in approvals in October 2014 big bank approvals grew about 3 percent in the past year, representing stronger growth than any of the other lenders—small banks, institutional investors, or credit unions—Biz2Credit tracks. Arora, who oversaw the research, attributes the growth of traditional large bank lending to the improving economy.

Technology also plays a part in the upswing in approvals by big banks and institutional investors. In February’s index report, Biz2Credit pointed to investments in digital tools for the growth of standard lenders. Technology helps expedite the application and approval process, and also aids lenders in the assessment of risk of default. It seems to be working, as less than 1 percent of institutional loans through the online platform have defaulted since January 2014, the March index reveals.

The emergence of institutional and big bank lending comes at the expense of alternative lenders. Approval rates dropped to 61.2 percent in March, down 0.2 percent from February and 2.4 percent since March 2014. Biz2Credit expects alternative lending to continue to decline. Marketplaces, such as Biz2Credit, provide small business owners with options, connecting them with a variety of lenders that can often offer funds at much lower rates. “Bad news for alternative lenders, but good news for borrowers,” Arora added.

There is potential for alternative lending to regain some of its lost market share. Millennials are poised to become the majority of the American workforce by 2016. Recent research shows this digitally savvy age group is much more likely to use non-traditional lenders than the generations before them. Fourteen percent of millennial small business owners have used non-traditional lending services, compared to only 1 percent of baby boomers and 3 percent of Gen Xers who have turned to alternative lenders, according to a Bank of America survey.

Lending by smaller lenders and credit unions is also in decline. For the fourth consecutive month, small banks denied more than half of their requests for small business loans. Small bank lending has been steadily declining since May of 2014. Approval rated for credit unions also remained well below 50 percent. March rates slipped slightly from the previous month. Over the past 12 months, loans granted by credit unions have not increased above about 44 percent of applications. “Credit unions peaked in 2012 in small business lending and have experienced a slow and steady decline nearly every month after that,” Arora states. “They never became the force in small business lending that they had hoped to become.”

Cautiously optimistic may be the best way to describe small business lending. In dollars total, lending may still be far off from pre-recession highs, but business owners are feeling positive about the future. Despite decreases in approvals in the Biz2Credit index, new players continue to enter the market. The value of the alt-lending industry may soon reach $1 trillion. Banks have traditionally been the main source for small business loans. In the years following the financial crisis, mainstream failed to meet demand. Alternative lenders filled the gap. The rapid expansion of the alternative lending market in Europe shows that while the sector may be slightly down, it is certainly not out.