NEW YORK—Small business lending approval rates at credit unions improved slightly in February, according to the Biz2Credit Small Business Lending Index.
However, despite the increase, credit unions are still losing market share to big banks and institutional lenders.
Lending approval rates at big banks have increased in 10 out of the last 11 months, according to the Index, a monthly analysis of 1,000 loan applications on Biz2Credit.com.
Credit unions granted 43.3% of loan applications in January, a slight increase from the record low approval rate of 43.2% in January 2015. “Credit unions are still struggling to increase their presence in the small business finance marketplace,” reported Biz2Credit.
Big banks ($10 billion-plus in assets) approved 21.5% of small business loan requests in February 2015, up from 21.3% in January, and are up 12.5% year over year.
“Big banks are starting to grant more conventional loans. This allows them to keep fixed loan expenses down compared to SBA-backed loans, which are not primarily being done at smaller banks,” explained Biz2Credit CEO Rohit Arora, who oversaw the research. “The investment in digitization at big banks has helped expedite the small business loan approval process.”
Meanwhile, institutional lenders granted 60.7% of funding requests by small business owners in February, an increase from 60.5% in January 2015. Approval rates by institutional lenders have increased each month since Biz2Credit began monitoring this category of lenders one year ago.
“Institutional lenders are willing to offer more loans that are financially appealing to small business owners,” Arora said. “The high approval rate in this category of lenders is a reflection of their strong investment in technology advancements, which enables them to quickly assess the risk of default. Thus, they are incredibly efficient; only a miniscule 0.77% of loans made by institutional lenders on our platform have defaulted."
For the fourth consecutive month, small banks denied more than half of their loan requests to small business owners, as lending approval rates at small banks remained stagnant at 49.6% in February. After reaching an all-time Index high in May 2014, lending approval rates at small banks have gradually declined.
"Smaller banks are better at offering SBA loans, but those loans take time to process. Creditworthy customers who seek quick funding are turning to other types of funding that take less time to process," said Arora. "This leaves smaller banks with less attractive borrowers than they had a year ago and explains why approval percentages are dropping."
Approval rates at alternative lenders—merchant cash advance companies, factors, and other non-bank institutions—dropped for the 13th consecutive month to 61.4% in February, from 61.6% in January. Their drop has coincided with the emergence of institutional lenders.
"Alternative lenders have been impacted most by the emergence of institutional players. As the economy continues to improve, small businesses with good credit standing don't have to borrow money at high interest rates often associated with alternative lenders," Arora explained. "Small business owners were often obligated to pay high interest rates during the 'credit crunch' when they were desperate for money. However, this is no longer the case."