Small companies pursuing capital during the month of August found mixed results from lenders. In a month where the overall volume of loan applications increased by 4.3%, my company’s Biz2Credit Small Business Lending Index, a monthly analysis of 1,000 loan applications, revealed that approval rates increased at small banks and alternative lenders, but big banks and credit union approvals dropped in August 2012.
Big banks ($10B+ in assets) granted 10.9% of funding requests last month — a drop from 11.3% in July. This is a setback, as big banks had experienced an upswing in approvals during both June and July.
The issue with big banks is a combination of global credit issues and regulatory pressure to keep their underwriting standards tight so that they can meet their underlying capital ratios. It’s no wonder why small business owners are frustrated.
In fact, according to a recent Wall Street Journal story, ”Footnote to Financial Crisis: More People Shun the Bank” by Gary Fields and Maya Jackson-Randall, middle class Americans are avoiding banks in the aftermath of the financial crisis.
However, small bank lending approvals jumped to 47.8% in August, up from 47.4% in July. The figure represents the highest approval rating percentage for small banks since we began the Index in 2011. The SBA lending program being pushed by small banks has increased their approval rates.
The loan approvals by credit unions dipped for a third consecutive month in August to 52.9%, the lowest percentage since June 2011. The slowdown in loan approval is partially caused by the 12.25% MBL ceiling, as well as sluggishness in credit unions’ willingness to book new business.
Meanwhile, alternative lenders – accounts receivable financers, merchant cash advance lenders, Community Development Financial Institutions (CDFI), micro lenders, and others – rose. In August 2012, alternative lenders approved 64.5% of loan requests, up from 64.1% in July and 6.5% higher than August 2011 approvals.
Alternative lenders recorded their highest approval rates since we began measuring the category. They are offering new products at cheaper pricing, which has helped to increase lending.
Month Big Bank % Small Bank % Credit Union % Alternative Lender %
Aug. 2011: 9.4% 43.8% 54.2% 58.0%
Sept. 2011 9.2% 45.1% 55.5% 61.5%
Oct. 2011: 9.3% 46.3% 56.6% 61.8%
Nov. 2011: 10.0% 47.0% 57.0% 62.0%
Dec. 2011: 9.7% 47.1% 57.4% 62.2%
Jan. 2012: 11.7% 47.5% 57.6% 62.4%
Feb. 2012: 11.7% 47.6% 57.8% 62.5%
Mar. 2012: 10.9% 47.6% 57.9% 63.0%
Apr. 2012: 10.6% 45.9% 57.4% 63.0%
May 2012: 10.2% 45.5% 57.6% 63.2%
Jun. 2012: 11.1% 47.5% 55.8% 62.9%
Jul. 2012: 11.3% 47.4% 54.6% 64.1%
Aug. 2012: 10.9% 47.8% 52.9% 64.5%
* Banks with more than $10 billion in assets are classified as “big banks.”
* Banks with less than $10 billion in assets are classified as “small banks.”
* Credit Unions are considered a category in the Biz2Credit Small Biz Lending Index.
* “Alternative lenders” include accounts receivable financers, merchant cash advance lenders, Community Development Financial Institutions (CDFI), micro lenders, and others.
As the Presidential election draws near, both parties will be looking at unemployment figures and small business growth as key issues. Mitt Romney and President Obama both want to be seen as the best person to help small businesses expand.
Many businesses have begun seeking short-term working capital to prepare for the upcoming holiday season. Of late, the best places to get it were small banks and alternative lenders.
Down Up Photo via Shutterstock
About Rohit Arora
Rohit Arora, CEO and Co-founder of Biz2Credit, is one of the country's leading experts in small business finance. Since its founding in 2007, Biz2Credit has arranged $800M in small business loans and has helped thousands of entrepreneurs. Rohit was named Crain's NY Business "Entrepreneur of the Year 2011." 
It all depends on the bankers policy and that’s why we are getting such a different data to study.
Thanks for this informative article because it gave me a new topic to research and disturb my college faculties with the difficult questions.
[...] Banking for small business. It turns out that one of the best places to go for small businesses in need of capital is a familiar source indeed. A recent survey found small banks increased their lending in August, while big banks offered fewer loans over the same period. Alternative lenders also increased the amount of money offered to businesses last month making them another viable option for small businesses. Small Business Trends [...]
I just came from my Small Bank….they are SO over regualated that it is almost impossible for the bank to lend money to small business.
It is good to see that your statistics show banks are lending to small business owners. However, I am still not optimistic that this trend will continue into 2013.
Global credit issues (China) may end up causing a big snag in this current lending mode but I strongly feel that the next big possible financial crisis will involve either the student loan industry or the trillion dollar derivative exposure that would make our last major financial meltdown look quite insignificant.
At any rate, my advice to small business owners is to have some viable alternatives in place while waiting for that bank loan to be approved. Your mentioning the merchant cash advance lending industry and it’s growth is just one of many options now available to small businesses.
Another financial platform that seems to be working quite well is providing in house customer financing to new customers. This can bring the much needed cash flow that could tie a small business over during tough times as well as assist an aspiring business owner wanting to expand.
These options would be critically important especially if conventional SBA or local bank funding once again becomes a stalemate.
Great comment Mr. Tapia. I fully agree. Not only is the needed but is essential. I always refer my clients to try to set up something like this for their customers. It just makes sense in this economy. I didn’t realize that there was a program like this out there. I viewed your site and was really impressed.
Mr. Tapia
In your comment you mentioned about a small business getting a customer financing program set up to bring in new customers. This was interesting. I went to your site, reviewed what you had to say and was impressed. As a small business owner, I am desperate for new ways to increase my cash flow. My bank has become useless, in fact I am working on going to switch to a credit union. I am not sure if they are much better, but a least I am treated like a person. I keep turning down customers who need financing to get my products. I could see at least 20-30 customers a month that I could at least try to get them approved on some kind of plan. Thanks for your input, you have opened my eyes to some new thinking.
I response to Floyd Tapia and Associates comment:
I had no idea there was a program like this out there anymore. I have tried care credit and they are ridiculous. High fees, and their approval rate is almost null. I had to cancel them within 60 days. I hope your approval rate is better than they are. I will try to get to your website and look at this further.
[...] may be able to offer more services than a credit union could. However, trends show approvals for loan applications at banks are on the decline, but on the rise at credit unions. So if financing at a bank isn’t [...]
[...] SmallBizTrends.com article highlighted the fact that entrepreneurs hoping to finance a business may want to steer away from [...]
[...] to entrepreneurs and consumers in general, although business owners are having more luck with smaller lenders. With lower interest rates available for savings and money market accounts, and fees for activities [...]
Thank you Rohit, Looks like Alternative Lending is where it’s at according to the statistics. Of course this won’t take into account many other factors that are in place to offset the risk of lending.I would go to a private, however, if I was in desperate for cash,
I agree with Floyd’s comment. My bank is borderline insane. They act like I am some kind of weirdo asking for financing. I have a great business, long-term relationship with BofA and they refuse to acknowledge me. I am moving to a CU, and I have a few customers that might be interested in your program. In any case, I enjoyed your comment and you were spot on! I need to increase my cash flow dramatically, and ASAP. I have some questions though, what is your approval rate? Can you answer that in this thread or is that something you can email me? Let me know, I will be following this conversation.