Strength seen in lending by big banks, small banks, and institutional investors in October 2019
The approval percentage for small business loan applications at big banks ($10 billion+ in assets) inched up one-tenth of a percent to reach 28% for the first time in the post-recession era during October 2019, according to the latest Biz2Credit Small Business Lending Index™.
With yet another interest rate cut by the Federal Reserve, small businesses are benefiting from positive economic conditions that are unrivaled in recent times. It has been a very good year for small businesses that are looking for capital. Better yet, I don’t foresee any changes during the rest of 2019.
Private sector, non-farm employment rose by 128,000 in October, and the unemployment rate was little changed at 3.6 percent, the U.S. Bureau of Labor Statistics’ Jobs Report issued on Friday, Nov. 1. Notable job gains occurred in food and beverage industry, social assistance, and finance. Many of the jobs are created by small businesses that are borrowing money to fuel their growth.
During the recently completed Fiscal Year 2019, SBA loan volume exceeded $28 billion with more than 63,000 approved loans. The approval rate at small banks, which often are SBA-approved lenders, also climbed one-tenth of a percent from September’s figure of 50.3% to 50.4% in October. The government guarantees that SBA loans provide to lenders helps mitigate their risk and makes it more palatable for them to grant requests from businesses that might not otherwise qualify for financing.
Traditional bank loans and SBA loans are available at smaller banks. Because of the overall strength of the economy, greater numbers of businesses qualify for funding. Having approval rates above the 50% mark is indeed a good sign.
Institutional lenders’ approval rates reached 66%, up a notch from September’s figure of 65.9%. They keep growing in importance for small businesses looking for capital. They offer loans at attractive rates and terms and are approving two-thirds of all of their funding requests.
Small business loan approval rates among alternative lenders dipped to 56.4% last month from 56.5% in September. Merchant cash advance companies, factors, and others provide money to companies that do not qualify for loans from traditional banks, albeit at much higher interest rates. Even as bank lending remains strong, alternative lenders play an important role a source of capital for many small business owners – especially ones who have credit scores of 650 or less.
Credit unions’ approval rate was 39.8% in October, just slightly up from September’s figure of 39.7%, which marked a record low for the lending category since Biz2Credit began analyzing business loan approvals in January 2011.
Credit unions should make it a goal in 2020 to either invest in digital loan application capabilities on their own websites or else partner with a FinTech firm that can provide the capability to do so. Although the Member Business Lending cap is a hindrance for some credit unions, the bigger problem is that many credit unions are technologically behind banks and alternative lenders.
Overall, the outlook for companies searching for capital has been positive throughout the first ten months of the year. I expect the trend will continue in November, December and into 2020.
