Big bank lending to small businesses has stalled for over a year, while credit unions return to an all-time low. Loan approval percentages rose at regional and community banks and non-bank lenders.
Small business loan approval percentages at big banks ($10 billion+ in assets) fell from 13.3% in July to 13.2% in August, according to the latest Biz2Credit Small Business Lending Index released . Last month’s figure represents a nearly two percent drop from August 2022, when approvals were from the largest banks stood at 15.1%. Big bank lending to small businesses has dipped every month since June 2022.
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“If you are a small business looking for funding, you will have a difficult time securing it from big banks. We have seen it for more than a year,” said Rohit Arora, CEO of Biz2Credit and one of the nation’s leading experts in small business finance. “Big banks always had deposit money on hand. They always thought of it as permanent cheap capital. Now the interest rates are higher.”
“Further, the branch systems that big banks built are expensive to maintain, and I expect that they will shrink. Banking has increasingly gone digital, especially post-COVID, and it’s not going back,” added Arora, a pioneer in fintech.
Small banks are still more reliable sources of small business loans because they typically process more government-backed SBA loans that reduce the lenders’ exposure to risk. Regional and community banks continue to see approval percentage increases, rising from 18.9% in July to 19.1% in August. However, the figures are far below what it was pre-pandemic. For instance, in February 2019, small banks granted more than half (50.3%) of their business funding requests.
“Following the collapse of SVB and other mid-sized banks, we increasingly see depositors taking money out of banks and putting it into U.S. Treasuries, money market accounts, and elsewhere. They have less money available to lend,” Arora said.
“In recent years, smaller banks became more active in commercial real estate loans and did not see the bottom falling out in the commercial real estate market,” he explained. “I suspect we will see downsizing and forced acquisitions in the coming months. Many mid-sized banks have high exposure in commercial real estate. This situation can only hurt small business lending.”
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The approval rates of Institutional investors also rose from 27.3% in July to 27.4% in August, while alternative lenders improved from 29.3% in July to 29.5% in August.
“Institutional investors and other non-bank alternative lenders remain frequent sources of capital for small businesses, although the interest rates they charge are typically higher than the rates of bank loans,” Arora said.
Approval rates at credit unions returned to their all-time low number of 19.8% in August, down 0.1% from 19.9% in July.
Total nonfarm payroll employment increased by 187,000 in August, and the unemployment rate rose to 3.8%, according to Jobs Report released by the U.S. Bureau of Labor Statistics on Friday, Sept. 1. Employment continued to trend up in health care, leisure and hospitality, social assistance, and construction. Employment in transportation and warehousing declined. Many of these jobs are created by small business.
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