It’s finally getting a little easier for small businesses to obtain the funds they need to invest in and grow their operations. Statistics from a variety of sources indicate a gradual loosening of lending to small businesses around the country.
The National Federation of Independent Business (NFIB), for one, reported in January that in its most recent survey, only four percent of small-business owners said that all their credit needs were not being met, matching a historic record low for the NFIB survey.
Large banks are increasing their lending
In particular, large banks have increased their lending to small businesses over the past year, though their loan-approval rates for small businesses remain far below those of smaller banks. In an October survey conducted by the Federal Reserve, about 12 percent of responding large banks said that credit standards for small businesses had eased somewhat in the prior quarter, while none said that their standards had tightened.
Statistics from Biz2Credit, an online platform which brings small businesses together with lenders, indicates that 17.6 percent of small-business loans were approved by large banks in December 2013, the highest level since the firm began tracking this data in 2011. The December figure was up 2.7 percentage points from 14.9 percent in December 2012.
Meanwhile, small-business-loan approval rates by small banks, while remaining substantially higher, at 48.7 percent in December, were about the same as a year earlier. By contrast, approval rates by “alternative lenders,” such as commercial credit firms, are much higher than bank lenders, at 67.3 percent in December, and were up 3.5 percentage points from a year earlier.
For Rohit Arora, Biz2Credit’s CEO, the big news is the increase in lending approval rates by big banks and the increased participation by alternative lenders. “Increasingly, creditworthy borrowers are applying for small business loans at big banks and having them approved,” he said in a statement releasing the latest numbers.
Arora continued, “Big banks, which request proof of three years of profitability, are now receiving applications from companies whose fortunes increased from 2011-2013. Borrowers are opting for non-SBA loans from big banks because these loans require less paperwork and generally are granted faster than SBA loans.” He said that approval rates at small banks “have stalled, in part because of the backlog of SBA loan-processing, and because big banks are becoming more active in small business lending.”
Alternative lenders are bigger players now
Analyzing the increased approval rates by alternative lenders, Arora said that “Alternative lenders picked up the slack from the SBA slowdown and are offering more lucrative terms to borrowers. Thus, borrowers are more willing to go to them for funding.”
He added that more alternative players continue to enter the marketplace, including yield-seeking investors such as insurance companies. And increasingly, he says, alternative lenders are using technology to make the online loan application process easier and faster.
Further evidence of increased participation by alternative lenders comes from a report by OnDeck, an online lender that makes term loans of up to $250,000. OnDeck’s CEO, Noah Breslow, reported in January that his company generated $65 million in revenue last year, a 150 percent increase over 2012 revenues. The increase comes following a separate report estimating that non-bank lenders provided about $3 billion to small business owners in 2013.
OnDeck also reported the following gains:
A 140 percent year-over-year increase in the number of customers served;
A 166 percent increase in the number of applications received; and
A 47 percent increase in the number of its employees.
A broader view of the expansion of alternative lending was taken by Kristy Campbell, director of marketing and communications at Manta, an online community for small businesses. “While traditional loans are still available, the requirements can be difficult for many businesses—especially those in the early stages—to meet,” Campbell said. “Newer options offer added flexibility and can more easily meet quick cash flow needs.”
A January article on Fox Business News’ Small Business Center website noted the significance of the alternative lenders in the small-business-lending mix. It noted that only a couple of years ago, “small business owners were almost completely shut out by banks that weren’t looking to lend.”
“That opened the door for more alternative players to enter the scene,” the article said. “Lenders like CAN Capital became well-known in the space, offering small businesses access to capital in a shortened time frame. More recently, retailing giant Amazon and Internet-payment-company PayPal have gotten into the game, also providing small businesses with quick access to cash.”
And according to the findings, “the options don’t stop there. Small businesses can also borrow money from peer-to-peer websites like Prosper.com and Lendio.com, or through crowd-funding sites like Kickstarter.com.”
“While these forms of borrowing may cost more than traditional business loans or home equity loans, they do give businesses an option to get around the stringent requirements that may have shut them out from bank loans. What’s more, small business owners can get access to the money in a much shorter time frame, which can mean the difference between the company continuing to operate and going under.”
Banks are evolving in the small business marketplace
Many banks are making a concerted effort to enhance and expand their service to small businesses. For example, in September, M&T Bank, based in Buffalo, NY, noted that it increased small business lending by $259 million in the previous 12 months, far exceeding the goal of a $50 million increase that it projected at a White House Small Business Lender Forum in Cleveland in September 2011.
The bank said it had increased new small-business-loan totals by $455 million over its 2010 baseline level, with the $259 million increase in the 12 months ended September 2013 coming on top of a $196 million increase covering the 12 months ended September 2012.
“We’ve long believed [that] one of the keys to renewed U.S. economic growth has been to get the small business job engine back on track,” M&T Bank Chairman and CEO Bob Wilmers said in the September statement “By increasing our lending to small businesses in our communities, we’re seeing those businesses create jobs, which helps generate more housing.”
First Niagara Financial Corp., based in Buffalo, NY, is also enhancing its small business lending process. In January, it introduced “redesigned Small Business Lending products and services focused on the evolving needs of its small business customers.”
In its announcement, the bank said, “To further enhance the service it provides to small business customers, First Niagara has introduced the Ready Access Line of Credit, an unsecured line of credit. Qualified small businesses will be able to access up to $50,000 on an unsecured basis, with no need to re-apply once approved. The company has also increased the term length on business loans up to seven years and has shortened the average loan approval cycle time for a business loan. These product changes follow the successful introduction of new Small Business checking accounts in 2013.”
“Small business is big business for First Niagara,” said John Golding, the company’s Small Business Director. “We recognize the important role that small businesses play in the revitalization of our local economies and we are committed to helping small business owners thrive and grow.”
The bottom line
What we’re seeing here is a gradual return to increased lending to small business from a wide variety of players. With the latest reports of improved economic growth and greater business confidence going forward, we should also expect to see further increases in lending to small businesses across the board.
Do you have any questions about lending and your small business? Have you benefitted from the recent increase in lending opportunities? Share your stories in the comments, or ask us your questions—we are happy to do our best to address them!
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