The rates at which the nation’s largest banks are willing to extend credit to small businesses has been infamously constrained since the onset of the recent recession, and have loosened only slightly as the rest of the economy made considerable steps forward. However, that tightness may now finally be relaxing, based on new data from the lending industry.
Small business loan approval rates by the biggest lenders in the country (those with $10 billion or more in assets) remains relatively low, especially compared with those of other financial institutions, but have taken a huge step forward from where they were just a year ago, according to new analysis from Biz2Credit. Though the current approval rate for these types of small business was still just 17.6 percent through the end of August, up only slightly from 17.4 percent in July, that was nonetheless considerably higher than the levels seen on an annual basis. In all, August’s figure among larger lenders was up more than 62 percent from the 10.9 percent approval seen 12 months prior.
Meanwhile, small banks climbed back to a point of approving more applications than they rejected last month, doing so for the first time since April, the report said. The latest figure of 50.7 percent approvals was up from 49.4 percent in July, and 47.8 percent a year earlier. Meanwhile, lending from credit unions took a slight step forward on a monthly basis but was still down substantially from a year earlier; current approvals from these institutions stands at just 45.3 percent, up from 45.1 percent in July. However, both lagged well behind the 52.9 percent observed in August 2012.
“Banks, both large and small, are becoming more aggressive in small business lending since it has proven to be a profitable part of their portfolios,” said Biz2Credit CEO Rohit Arora, who oversaw the research. “Additionally, banks typically attract higher quality borrowers than credit unions and alternative lenders, so they are becoming more apt to grant loan requests. Five years after the Great Recession, small business lending landscape is better than at any time since 2008. The resurgence of small business loan-making at traditional banks is impacting alternative lenders, who generally charge higher interest rates. Borrowers would rather apply to banks with brand names that they trust, particularly since they are easing their lending criteria and granting more loans than at any time since the recession.”
The survey examined all loan requests submitted by small businesses with more than two years of having credit scores in excess of 680, which would almost certainly be able to grant them access to many types of credit they may be seeking, the report said. In all, these requests for additional financing ranged between $25,000 and $3 million.
What does this mean for small business owners?
Many small business owners may feel better about their companies’ abilities to succeed given that the effects of the recession continue to recede and may be leading to expectations for improved sales. However, they may not be able to realize those plans if they cannot add to their inventories or hire more workers, and thus a general lack of credit availability from lenders of almost any size could be problematic going forward for many independent companies.
Owners who want to gain a little more financial flexibility in the near future may want to consider ways they can reduce their small business insurance costs. Cutting general liability insurance premiums and other policies necessary to small businesses may be a great way for companies to save money and devote those funds to other pressing needs instead.