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SME Alt Lenders Weaken Threat Against Big Banks

The discussion on small business lending largely focuses on the rise of alternative financers and their ability to offer SMEs an alternative to Big Bank rejections. But new findings from Biz2Credit’s Small Business Lending Index revealed that mainstream banks are actually approving SME borrowing applications at record rates.

The data, released Tuesday (May 12), found that April 2015 Big Bank loan approval rates for SMEs stood at 21.7 percent, up from 21.6 percent the month prior. This marks the sixth month in a row that mainstream banks have improved their SME loan approval rates.

Institutional lenders similarly boosted their small business approval rates, which stood at 61.1 percent in April, up from 60.9 percent in March. Institutional lenders have reportedly improved their approval rates in every month since Biz2Credit first began reporting its index in January 2014.

Small banks also increased their lending approval rates to 49.6 percent, up from 49.5 percent, the research found. Despite the improvement, this marks the sixth consecutive month that small banks denied more than half of small business loan applications.

Meanwhile, alternative lenders actually lowered their approval rates for SMEs. April 2015 approval levels fell to 61.1 percent in April, down from 61.2 percent in March. Alternative lenders have decreased their approval rates every month since January 2014, Biz2Credit reported, a correlation with the rise of institutional lenders. According to Biz2Credit CEO Rohit Arora, alternative lenders’ high brokers’ fees – which can hit up to 10 percent upfront – are factored in as interest rates for small business owners, which similarly works against alternative lenders.

The findings confirm earlier reports by PYMNTS this week that while SMEs are often considered to be distrusting of mainstream banks, high brokers’ fees mean that small business owners hold a similar distrust of alternative financers.

According to Arora, the conclusion of tax season has made it clear that the economy is improving, a trend reflected in higher SME loan approval rates. “I expect that loan approval rates will continue to go up in the foreseeable future,” the executive said.

The research also suggests that institutional lenders, not alternative lenders, should be perceived as a more robust threat against mainstream, large banks.

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