Volatile markets and plummeting oil prices have impacted small business loan approval rates.
According to the latest Biz2Credit Small Business Lending Index, the monthly analysis of more than 1,000 small business loan applications on Biz2Credit.com, loan approval rates at both big and small banks declined in January.
Alarmingly, the report found that loan approval percentages at credit unions dropped to an all-time index low.
Reflecting on the findings, Biz2Credit CEO Rohit Arora says, “The turbulence in the stock market and plummeting oil prices in the last month have resulted in a level of uncertainty for lenders.”
He also adds, “While the demand for small business loans held up, the approval standards tightened.”
The big bank approval rate in January was 22.7 percent, a 20 basis point decline from December. It is, however, still a 6.5 percent increase from January 2015.
“Outside economic factors attributed to the drop in loan approvals at big banks last month,” Arora commented. “When there is uncertainty in the market, mainstream lending institutions are less inclined to take risks on loans.”
Arora believes small banks’ lethargy in adapting to technological innovations to streamline the loan application process is preventing them approving more loans. He feels credit unions have also been too slow to adopt technological innovations. As a result, applications from creditworthy borrowers have declined.
At the same time, institutional and alternative lenders saw small growth in their approval rates in January. Lending approval rates at institutional lenders saw a slight increase in January, improving 62.6 percent from 62.5 percent in December. It’s worth noting that since their inclusion in the index in 2014, institutional lenders have not experienced a setback month.
According to Arora, “Institutional lenders are doing a great job at minimizing the risks of borrowing requests through advanced algorithms.” As the uncertainty in global emerging markets continues to grow, Arora expects institutional lenders to remain a “popular commodity for both investors and borrowers.”
Loan approval rates at alternative lenders remained improved in January, the approval percentages, however, have declined steadily since January 2014.
The dip in small loan approvals at bank and credit unions comes after a long period of steady ascent. Since 2014, small business loan approval rates have risen steadily every month even though, as Arora points out, these lenders are now approving fewer loans.
The fact that the best banks for small business loans are struggling to adapt to technology is also impacting the loan approval rates.
In the coming days, a lot will depend on the stock markets and oil prices to determine whether this drop is just a blip or the beginning of a trend.
For its monthly index, Biz2Credit analyzes loan requests ranging from $25,000 to $3 million from companies in business more than two years with an average credit score above 680. Unlike other surveys, the results are based on primary data submitted by more than 1,000 small business owners who applied for funding on Biz2Credit’s online lending platform, which connects business borrowers and lenders.
More in: Biz2Credit
Great article Shubhomita. It’s not surprising to see that small businesss loan approvals at both small and big banks have declined. But what is surprising is the decline in small business loans from credit unions. Post Dodd-Frank, I believe that credit unions in additoin to alternative lenders will play a larger role in filling the gap left by both small and big banks in the small business lending market.
I also believe that this inclines small business owners to become more proactive in presenting their businesses as a solid investment by minimizing business risk as much as possible before soliciting a business loan. Far to often small business owners do not tighten up on the operational and financial models of their firms prior to applying for a businesss loan.
Particularly as the stock market and commodities markets self correct themselves, it’s paramount that small business owners take the initiative and employ sound operational and financial controls to ensure they are presenting their business in the best way in order to obtain a business loan.