On Tuesday, online resource for small business finance, Biz2Credit announced its recent reported revealed that loan approval rates at banks improved while alternative lenders’ percentage dropped significantly last month.
The website confirmed that big banks ($10 billion+ in assets) approved 23.1% of loan applications in April, up one tenth of a percent in the last month and the highest approval percentage since the Index began more than five years ago. In fact, lending approval rates today are more than twice as high as they were in April 2011 during the so-called “credit crunch.”
Biz2Credit CEO Rohit Arora, who oversaw the research, commented:
“Big banks have been the tortoise while alternative lenders have been the hare. Their approval percentages have climbed slowly and steadily for several years. As more banks continue to leverage technology, the risks of loan defaults are better identified. It also lowers their loan processing costs. This has resulted in an increase in the banks’ willingness to lend.”
Lending approval rates at small banks also improved to 48.8% from 48.7% in March 2016. Arora stated:
“Small banks are still doing a lot of SBA loans, which are government-backed and thus are less risky to make. From May onward, small bank approvals go up as companies that filed for tax filing extensions then can start borrowing for expansion, working capital and refinance.”
Meanwhile, alternative lenders took a big hit in April, approving loans at a rate a half percentage point lower in the last month to 60.2%. Arora explained:
“We may be seeing a bit of a correction in the marketplace. Alternative lenders were willing to make riskier loans, but could afford defaults because their high interest rates reflected the volatility of the non-bank loan market. As the banks keep making loans at attractive rates to higher quality borrowers, alternative lenders are losing out. They may soon become an afterthought for small business owners, especially those with good-standing credit who no longer have to borrow at any cost.”
He then revealed:
“Despite this small hiccup, institutional lenders should still be considered one of the strong driving forces in the industry. The high yields in small business remain attractive, and I expect a rebound in the approval rates in coming months. There is little compliance risk in small business lending for them. It’s an attractive asset class for them.”
Arora went on to state that credit unions have continued to deny an increasing percentage of loan requests, granting an all-time Index low of 41.9% in April, down one tenth of a percent from March. This marks the eleventh consecutive month that loan approval rates have declined at credit unions.
“Credit unions are wavering in the small business finance space largely because of their inability to adapt to the technological advancements that competing categories of lenders are implementing.”
