Approval rates at big banks — with $10 billion in assets — continue to climb in large part because of more favorable interest rates, compared to competitors that include small banks, alternative lenders and credit unions.
As measured by Biz2Credit’s monthly lending index, lending at big Banks and institutional investors have hit post-recession highs, while credit unions dipped to a new low.
Big banks approved 21.3 percent of small business loan requests in January 2015, up from 21.1 percent in December 2014, says Biz2Credit.
Small banks (less than $10 billion in assets) still hold a considerable advantage in overall approval rates for small businesses, but their rates have been trending downward.
“Big banks set another Index high because they are willing and able to make large loans and still have an interest rate advantage over competitors,” said Biz2Credit CEO Rohit Arora, who oversaw the research. “The big banks typically seek to grant loans in excess of $2 million.”
For the third consecutive month, small banks are denying more than half of their loan requests. Moreover, lending approval rates by small banks dropped for the eighth month in a row as they green-lighted 49.6 percent of loan requests from small business owners in January, which is slightly below December’s mark of 49.7 percent.
“Small banks are in a crunch; they cannot compete with the brand name advantages and low rates of big banks. 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,” Arora said.
Meanwhile, institutional lenders granted 60.5 percent of funding requests by small business owners in January, an increase from 60.1 percent in December. Approval rates by institutional lenders have increased each month since Biz2Credit began monitoring this category of lenders one year ago.
“Institutional lenders are making longer term (5-year) loans and giving them larger amounts — up to $1 million,” said Arora. “Their approval rates are higher because the investments they have made in technology enables them to act quickly and minimize risk. Small banks and credit unions are lagging in technological updates.”
Approval rates at alternative lenders — merchant cash advance companies, factors, and other non-bank institutions — slipped for the 12th straight month to 61.6 percent in January, from 61.8 percent in December.
“Like small banks, alternative lenders have been hurt by the emergence of institutional players,” Arora said. “With a growing economy, healthy small businesses do not need to borrow money at the high interest rates they paid during the credit crunch when they were desperate for money.”
Credit unions granted 43.2 percent of loan applications in January, a slight drop in the approval rate of 43.3 percent from the previous month. They continue to struggle in the small business finance marketplace, says Biz2Credit.