NEW YORK—Approval rates for loans to small businesses continue to increase at credit unions, while the rate is declining at big banks, according to a new report.
Credit unions approved 43% of loan applications in April, a slight drop from 43.1% in March 2015, according to the Biz2Credit Small Business Lending Index, a monthly analysis of more than 1,000 small business loan requests nationwide. Small business lending approval rates at credit unions have dropped in five of the last six months.
Meanwhile, small business lending approval rates at big banks ($10-billion plus in assets) and institutional lenders continued to reach new heights, according to the Index. Approval percentages at big banks have increased in 12 out of the last 13 months. Big banks approved 21.7% of small business loan requests in April, up from 21.6% in March.
CUs are approving small business loans at a historically low rate, said Biz2Credit CEO Rohit Arora. “Credit unions are not adapting to their counterparts quickly enough with respect to improvements in technology.”
Due to tax returns being filed and the economy doing better, Arora expects that loan approval rates will continue to go up in the foreseeable future.
Meanwhile, institutional lenders approved 61.1% of funding requests by small business owners in April, up from 60.9% in March. Approval rates by institutional lenders have increased each month since Biz2Credit began monitoring this category of lenders in January 2014.
“Institutional lenders are becoming mainstream lenders in the small business market and are supplanting cash advance companies among non-bank sources of capital,” Arora said. “Since advance companies charge a premium rate, the laws of economics dictate that unless you differentiate the product, eventually a lower price competitor will steal market share. We have seen this happen to cash advance companies.”
Small business lending approval rates at small banks improved one-tenth of a percent in April to 49.6% from the previous month. Although the rate of funding requests improved, this category of lenders has denied more than half of their loan requests for their sixth consecutive month, said Biz2Credit.
“Small banks are holding steady, but they face fierce competition as institutional players are becoming mainstream,” explained Arora.
Approval rates at alternative lenders – merchant cash advance companies, factors, and other non-bank lenders – dipped to an Index-low of 61.1% in April, from 61.2% in March. Alternative lenders' approval percentages have declined each month since January 2014, coinciding with the emergence of institutional lenders in the small business lending marketplace.
“Cash advance companies use a network of brokers who charge 8% to 10% upfront,” explained Arora. “This fee is factored in the form of high interest rates, which are working against alternative lenders.”