Turbulence in global markets has made big banks wary of approving small business loans. That’s what the latest Biz2Credit Small Business Lending Index (PDF), the monthly analysis of more than 1,000 small business loan applications on Biz2Credit.com has revealed.
Details from the July 2016 Biz2Credit Small Business Lending Index
According to the report, small business loan approval rates have dropped at both big banks and alternative lenders in July.
The big bank approval rate declined to 23.1 percent in July, down two-tenths of a percent from June’s figure. Meanwhile, alternative lenders approved three out of five loan requests in the same period.
In a prepared release, Biz2Credit CEO Rohit Arora observed, “The economy in the second quarter was a bit sluggish because of slower global growth; this impacts big banks more than other lenders.”
“When there is turbulence in international markets, such as the angst over Britain’s leaving the EU, big banks tend to become more conservative in their lending. Brexit had some impact, but not a major one, on small business finance.”
Explaining why lending plummeted at alternative lenders, Arora said, “Alternative lenders have steadily lost favor among small business borrowers, in large part because their cost of capital is so high.”
“Credit-worthy borrowers can typically secure better interest rates and terms from other types of lenders. Alternative lenders still have some appeal for borrowers whose credit scores might be low.”
While small business loan approval rates dropped at big banks and alternative lenders, not all the news from July was bad.
Institutional lenders’ loan approval rates bounced back to 62.8 percent, matching an all time index high. Small banks also saw a slight increase in their approval rates.
According to Arora, “This category (institutional lenders) of lender is doing well because of high yields and low default rates. Further, institutional investors from other countries are looking to enter the U.S. market as there currently is much global uncertainty, especially in Europe.”
He also added that the current global market scenario doesn’t have as much impact on small banks as it does on larger ones.
For small businesses that are currently profitable, securing loans for expansion should not be a challenge, the index suggests.
Arora echoed this when he told the New York Daily News, “Rates are still historically low, and small businesses that are currently profitable are able to get loans for expansion and working capital.”
Moreover, the U.S. economy is stable, which is definitely good news for small business owners, Arora obsrved.
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.