How To Improve Small Business Lending
Can you believe that the Great Recession started nearly 10 years ago? The U.S. National Bureau of Economic Research says that the recession began in December 2007, was at its zenith in December 2008, and ended in June 2009. After that was more than 24 months of a “credit crunch” when banks restricted small business lending. In most of 2011, big banks approved fewer than 10% of the loan applications submitted by small business owners looking for credit, according to the Biz2Credit Small Business Lending Index™. At the same time, small banks—usually are a reliable source of funding for entrepreneurs wanting capital—decreased to 42.7%.
These developments led to more alternative lenders to fill the void when traditional funding sources dried up. Small business owners used these, including online services that connect borrowers and lenders and merchant cash advance companies that are more apt to provide funding—but at higher interest rates. But in recent years, institutional investors have emerged as reliable funders.
The good news is that things have dramatically improved since the “credit crunch,” with loan approval rates at big banks increasing to a post-recession high in July 2017. Also, the approval rates at small banks increased to 48.9%
The main driver of this phenomena is the strong performance of the U.S. economy. Markets are high, unemployment is at a 16-year low, and small business owners are more confident. Small business loan volume is at its highest level in nearly two years, according to the PayNet Small Business Lending Index.
In addition, the Federal Reserve’s interest rate hikes have made small business lending more profitable and give banks motivation to make loans. Because of this, entrepreneurs have shown confidence and are willing to take risks, and modest interest rate increases haven’t worried potential borrowers
Finally, non-bank lenders have consolidated with alternative lenders had their deals decline as banks rebounded in small business lending. Plus, institutional lenders’ loan approval rates have risen to a new high of 63.9%. Further, foreign investors are looking at the U.S. and see opportunity in small business lending.
Changes in the Wind?
While the lending landscape could be altered if President Trump shows the ability to push through legislation on tax reform, this isn’t on the near horizon. This lack of follow-through on
his major campaign promise hasn’t impacted the needs of small business borrowers, and lenders have demonstrated that they are willing to lend.
Contact an Expert
Andrew Rogerson in Sacramento, California specializes in helping business owners sell their business. This includes a business valuation, creating a marketing strategy, and handling all phases of the transaction including third-party lending, due diligence, and escrow.