Three Reasons Why Bank Lending to Small Businesses Has Reached Post-Recession Highs

Three Reasons Why Bank Lending to Small Businesses Has Reached Post-Recession Highs

 

While it may not feel like it, the Great Recession started almost a decade ago. According to the U.S. National Bureau of Economic Research the recession began in December 2007, peaked in December 2008, and ended in June 2009. What followed for more than two years afterward was a “credit crunch” during which banks, both large and small, tightened the spigot on small business lending.

In fact, for much of 2011, big banks approved less than ten percent of the loan applications submitted by small business owners in search of credit, according to the Biz2Credit Small Business Lending Index™, the monthly analysis of more than 1,000 small business loan applications on Biz2Credit.com. For instance, in June 2011, big banks (assets greater than $10 billion) granted an anemic 8.9 percent of funding requests. Meanwhile, small banks, which were usually a reliable funding source for entrepreneurs seeking capital, the number dropped to 42.7 percent.

What these developments led to was the rise of alternative lenders, who filled the void when traditional funding sources dried up. Small business owners turned to these new sources, including online platforms that connect borrowers and lenders and merchant cash advance companies that more willingly provided funding, albeit at higher interest rates. More recently, institutional investors have emerged as reliable funders.

Fortunately, things have improved vastly since the so-called “credit crunch.” Loan approval rates at big banks increased to a post-recession high in July 2017, while approval rates at small banks also rose to 48.9%, and are now inching to the 50 percent benchmark. What is driving it?

Firstly, despite the drama surrounding President Trump, overall, the U.S. economy is performing well. The markets are high, unemployment is at a 16-year low, according to the August Jobs Report, and small business owners are feeling confident. In fact, small business loan volume is at its highest level in nearly two years, according to the most Thomson Reuters/PayNet Small Business Lending Index. Even though President Trump has not delivered on tax cuts, optimism is still abound.

Secondly, the Federal Reserve’s interest rate hikes have made small business lending more profitable and provide incentive to lend. The Fed would not be raising rates if the U.S. economy were shaky. In turn, entrepreneurs have shown confidence and are willing to take risks. The modest interest rate increases have not scared off potential borrowers.

Thirdly, non-bank lenders have consolidated. Alternative lenders that charged rates that were too high saw their deals decline as banks rebounded in small business lending. Further, institutional lenders’ loan approval rates have risen to a new high of 63.9 percent. Foreign investors see the U.S. as a stable haven for investments that provide good yields. Global investors see opportunity in the small business lending space.

Certainly, things could change. President Trump hasn’t demonstrated the ability to push through legislation yet. We don’t know if the tax cuts will come at all or what the replacement for Obamacare will be. These were signature parts of his platform. However, these realities haven’t dampened the appetites of small business borrowers, and lenders have demonstrated that they are equally willing to lend.

 

This article was written by Rohit Arora from Forbes and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.

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