After years of low approval rates from big banks for small business loans following the financial crisis, things have finally started to turn around.
By Tracy Kellaher, VP of Business Development & Lender Relations for Biz2Credit
Approval rates on business loans from big banks (those with over $10 billion in assets) have improved dramatically over the past year, according to the Small Business Lending Index from Biz2Credit.
“Credit union approvals of small business loans have plummeted from 57.6% a year ago to a low of 45.2% — a 12.4% drop. There is no indication that this trend will reverse soon.”
The index, which has been tracking bank approval rates since January 2011, compiles data from companies applying for loans from $25,000 to $3 million. All companies in the study have been in business at least two years and have credit scores above 680.
The index shows that big bank approval leapt in September 2012, and since then it has been steadily increasing. In April big bank approval rates for small business loans reached a record high, peaking at 16.8%. In a year-to-year comparison, approvals at big banks are up over 50%.
( Read More: Satisfaction With Small Business Banking Keeps Dropping )
There are a few factors behind the improvement. For starters, the economy has improved, making credit more readily available. For the past year and a half, market conditions have been relatively stable — this despite fears of fiscal cliffs and Congressional sequestration. And September’s 30% jump in big bank business loan approval rates coincided with an unexpectedly good jobs report, and this year’s highs match a stock market that has been climbing rapidly since November.
Big banks are focusing on small business as key part of their strategy to meet capital requirements in the wake of Dodd-Frank regulations. Financial institutions may have finally awakened to the fact that years of low approval rates for business loans can sour the tenuous relationship between banks and small businesses, discouraging depositors and borrowers alike.
Initiatives from the Small Business Administration are another significant reason for the increase in big bank approval rates. Starting in October, the SBA will waive fees for lenders and borrowers for smaller ticket loan programs ($150,000 and less). Also, last year the SBA partnered with 13 big bank lenders — including Chase, Wells, Citi — and BofA to commit $20 billion to lend to small businesses over three years, with an emphasis on small-dollar loans and underserved communities. These funds have already started making their way into the hands of small businesses, further boosting approval rates. And the fact that SBA-backed securities now have very attractive premiums make it even more worthwhile for the big banks to extend credit and take the government guaranty.
All this is good news for small business owners, who were left largely with only higher interest rate options from alternative lenders during the depth of the crisis. Big banks’ lower cost of capital and corresponding lower rates is certainly attracting the business back.