Alternative lending was born from a lack of big bank financing for small businesses in the wake of the financial crisis. But according to the latest figures from Biz2Credit, neither big banks nor alternative lenders are doing so hot in terms of SME loan volume.
The latest report of its Small Business Lending Index, released on Tuesday (Aug. 9), revealed that big banks — those with more than $10 billion in assets — reduced their small business lending volumes in July 2016. Approval rates sunk to 23.1 percent last month, down two-tenths of a percent compared to June figures.
Alternative lenders, though, also saw a decline in their SME loan approval rates, decreasing from 60.1 percent to 60 percent between June and July.
According to Biz2Credit CEO Rohit Arora, there are reasons for both of these trends.
“The economy in the second quarter was a bit sluggish because of slower global growth; this impacts big banks more than other lenders,” the executive explained in a statement. “When there is turbulence in international markets, such as the angst over Britain’s leaving the EU, big banks tend to become more conservative in their lending.”
Economic uncertainty may be a short-term factor slowing big bank lending to small businesses, but for alternative lenders, Arora explained, the trend may be more long-term.
“Alternative lenders have steadily lost favor among small business borrowers, in large part because their cost of capital is so high,” stated Arora. “Credit-worthy borrowers can typically secure better interest rates and terms from other types of lenders.”
Meanwhile, approval rates among institutional lenders increased last month to an all-time index high, hitting 62.8 percent. Credit unions, however, hit an all-time index low in small business loan approval rates, dropping to 41.5 percent, researchers found.