Approval rates for small business loans are at some of their most optimistic levels since the 2008 recession, new research shows – a trend that could spell trouble for small banks, credit unions and alternative lenders.
According to new data from the Biz2Credit Small Business Lending Index, big banks – that is, banks with $10 billion or more in assets – approved of 21.3 percent of small business loan applications in January 2015, up from 21.1 percent the month prior.
Institutional lenders similarly boosted their small business financing with 60.5 percent of loan applications getting approval in January, compared to 60.1 percent in December 2014. According to Biz2Credit, approval rates for small business loans by institutional lenders have been climbing every month since first monitoring trends in this lender category one year ago.
For big banks, small business loan approvals are up because the lenders can offer more competitive interest rate than their rivals, according to Biz2Credit CEO Rohit Arora. And when it comes to institutional lenders, the loan approval increase can be attributed to those lenders making greater investments in technology that, Arora said, “enables them to act quickly and minimize risk.”
“Small banks and credit unions are lagging in technological updates,” he explained.
That lag is reflected in the data, too. According to the most recent numbers, small banks are rejecting more than half of loan applications – the third consecutive month for such a pattern. Biz2Credit found that small banks approved 49.6 percent of small business loan applications in January – down from a 49.7 percent approval rate the month prior.
Arora explains that there a mix of factors, in addition to less advanced technology, that cause smaller banks to lose out on business. “They cannot compete with the brand name advantages and low rates of big banks,” he said. “Meanwhile, they haven’t kept pace with online and mobile loan applications when institutional lenders are investing heavily in it. Small banks can’t make decisions as quickly, and borrowers are going elsewhere.”
Alternative lenders are seeing a similar struggle to compete in the small business loan market; this category of lenders saw an approval rate of 61.6 percent in January, down from 61.8 percent in December. According to Biz2Credit data, approval rates from alternative lenders have been sliding for 12 months straight.