Alternative Finances

Big Banks And Loan Platforms’ Speed Wins Best SME Loan Customers

Successful small businesses want loans faster, and that means they’re turning to big banks and marketplace lending platforms instead of small banks, according to a monthly report from Biz2Credit.

As a result, the loan approval rates for large banks (those with more than $10 billion in assets) and institutional investors (who increasingly lend through marketplace platforms) continued to rise in February, Biz2Credit’s Small Business Lending Index showed.

Meanwhile, smaller banks are saddled with the lengthy time required to process Small Business Administration (SBA) loans, according to Biz2Credit CEO Rohit Arora. With faster approvals available from big banks and lending platforms for the best loan customers, small banks are left with less creditworthy applicants.

“Big banks are starting to grant more conventional loans. This allows them to keep fixed loan expenses down compared to SBA-backed loans,” said Arora. “The investment in digitization at big banks has helped expedite the small business loan approval process.” Analytics have also helped institutional lenders — non-banks putting the money of high-asset investors to work — keep risk down and maintain a default rate of only 0.77 percent, Arora said.

In February, big banks approved 21.5 percent of small business loan applications, up from 21.3 percent in January after climbing for 10 of the past 11 months for a year-over-year increase of 12.5 percent. Institutional investors approved 60.7 percent of small-business loan applicants, up from January’s 60.5 percent after rising steadily for the past year.

But small banks turned down more than half of their applicants, with an approval rate of 49.6 percent, the same as in January. Small-bank approvals have been falling since they peaked in May 2014 at 51.6 percent. “Creditworthy customers who seek quick funding are turning to other types of funding that take less time to process. This leaves smaller banks with less attractive borrowers than they had a year ago,” Arora said.

Approval rates at what Biz2Credit calls “alternative lenders” — relatively high-interest lenders such as merchant cash-advance companies and factors — have been dropping for the past year, hitting 61.4 percent in February, down from 61.6 percent in January. Institutional investors appear to be skimming off the best loan prospects from that group, too.

And credit unions, which are struggling to increase their presence in small-business loans, approved 43.3 percent of applications, a slight rise from 43.2 percent in January — the lowest credit-union approval rate Biz2Credit has recorded.

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