Small Business Loan Approvals at Big Banks Slip to 14.2% in February

Small businesses give their best effort when applying for business loans from NBFCs or banks. Why? The availability of funds helps determine their success.

Proper funding also provides them with the necessary capital to grow or start a new project. They can even use the funding to consolidate their debt. This ensures good cash flow while overcoming financial crunches.

But if small business loan approvals at big banks constantly slip, what does it mean to the borrowers?

Recent Small Business Lending Index Reveals a Decrease in Loan Approval Rates at Credit Unions and Big Banks in February 

The latest Small Business Lending Index report revealed another slip in loan approval percentages at big banks, falling from 14.4% in January 2023 to 14.2% in February. This marks the 9th consecutive month in which approval rates in big banks have declined.

Meanwhile, small bank business loan application approval rates also dropped to 21.3% in February, down one-tenth of a percent from 21.4% in January.

The approval rates of non-bank or alternative lenders were up slightly, with 27.9% in February from 27.8% in January. Similarly, 26.3% of funding requests were granted by institutional lenders in February. This is an increase from 26.1% the month prior.

For now, it would be more difficult for small business owners to get loans from big banks. Most small business borrowers are waiting to see whether the interest rate increases will end or not in the following months.

Looking at 2022, small business loan approvals percentages from big banks rose. After that, they steadily declined, providing similar figures in December 2022 and January 2023.

The 2nd Worst Credit Unions Performance Since January 2011

Small business loan approval rates for lending applications at credit unions declined again. Last month, credit unions produced 20.0% of lending approvals, which is equivalent to one-tenth of a percentage from January. That percentage was considered the second-worst credit union performance since lending approval rates were monitored in January 2011.

It was only in April 2020 that there was a lower figure of 18.1% when the COVID lockdowns significantly impacted the economy.

According to many small business finance and fintech experts, the month of February was not ideal for most small business borrowers. With the fallout from the Silicon Valley Bank (SVT) fallout, they fear many companies would find it more challenging to secure capital.

Big banks are considered the most financially stable institutions. But lending at these banks has stalled for several months. Given what has occurred lately, small banks are expected to be cautious in lending. Experts predict that small businesses might encounter a real danger – a credit crunch.

Furthermore, Fed Chairman Jerome Powell notified everyone about the possibility of another hike the following month. However, given recent events, it tends to be harder to do. The high capital cost alongside the stingy lenders is not an ideal combination for many small business borrowers.

In February, non-farm payroll employment rose by around 311,000. Plus, the unemployment rate increased by 3.6% based on the Bureau of Labor Statistics Jobs Report released on March 10. Job gains happened in health care, government, retail trade, leisure, and hospitality. Most of these jobs were built by small businesses.

Small Business Borrowers Prefer Alternative Lenders Because of Bank’s High-Interest Rates 

While loan approval percentages of small business loans at big banks continuously slipped, lending rates at non-banks and small banks improved.

Business loan application approval percentages at small banks have increased to 21.4% in January from 21.2% in December. With traditional term and SBA loan interest rates climbing, the capital cost from non-bank lenders is not higher than from banks.

Most companies that need working capital choose to get funding from non-bank lenders because they get money quicker despite a little higher rate. High-quality customers go to alternative lenders since big banks are stingy.

Long-term rates, inflation, and employment fluctuate over time as a result of financial and economic disturbances. The monetary policy of the Federal Reserve plays a critical role in economic stabilization in response to those disturbances.

The Primary means of FOMC (Federal Open Market Committee) for monetary policy adjustment is changing the federal funds rate target range.

At the FOMC meeting last February, the committee said, “ongoing increases in the target range will be appropriate to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.” 

Meanwhile, during the February Economic Club of Washington discussion, the FED Reserve Chair Powell stated that the funds’ rate might climb higher if strong labor data persists while higher interest rates spur disinflation.

During the February meeting, the Fed raised the funds rate by 25 bps from 4.5% to 4.75%. While the increase’s size is lower than the previous hikes, the capital cost was the highest figure since 2007.

Powell said after announcing the increase on February 1, “We continue to anticipate that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. Although inflation has moderated recently, it remains too high.” 

Moreover, business loan borrowing rates continuously climb, and business owners expect that the increase in interest rate will come to an end in early 2023. However, this hope seems not going to happen any time soon.

Powell added, “It will be bumpy. It’s a good thing that inflation has come down despite the right labor market.”

The job figures bring both advantages and disadvantages to small business owners. Inflation will likely linger for a more extended period while people work and spend. If the Fed continues to raise its fund rates, borrowing money will become more expensive.

As the Fed signals more rate hikes soon, business owners will find it harder to obtain the required funding in the short term at a reasonable rate. Business owners who plan to apply for financing, including working capital for growth, are advised to do it before the rates increase again, preferably in March.

What are the Factors that Can Affect Your Loan Decisions 

Is your business starting to grow? Then, you may pursue business opportunities that require more funds.

Now that you are aware of the current condition of small business loan approvals, it’s time to understand what lenders look for during the loan application evaluation.

How You Will Use the Funding 

Lenders always want to ensure borrowers use the right product for their specific needs. And here are some of the options:

• Small Business Credit Card – used to manage day-to-day expenses
• Line of Credit – designed for short-term working capital needs
• Commercial Term Loan – used to finance more significant investments over time

Are you not sure which financing type you will need? You can ask for expert advice. Experts will help you get familiar with different options and decide which one is the best for your situation.

The Financing Amount You Are Seeking 

If you attempt to borrow more than your business needs or affords, lenders will consider it a red flag. Also, they will question your loan application if you do not borrow a sufficient amount for your demonstrated need.

For example, if a doctor is applying for a loan you will use for a new practice but does not include the office build-out, they might end up cash-trapped. This is why it makes sense to borrow additional funds to get more cash on hand in the short term.

Your Personal and Business Credit Profile 

When borrowers submit their credit applications, lenders often look at both their personal and business credit standing.

On a small business loan, borrowers sign almost a personal guarantee, which legally binds the promise to repay the fund that the business has borrowed – from their personal assets.

Before submitting a loan application, review your business and personal credit reports for incorrectly reported delinquencies or delinquent accounts with the major reporting agencies.

Your Ability to Repay 

The loan application must reflect the borrower’s capacity to repay the borrowed money. Generally, lenders will ask for

• At least 2 years of business and personal tax returns
• A debt schedule with business debt details
• Personal financial statements

Furthermore, lenders might ask for year-to-date balance and profit-and-loss sheet statements. This will help them understand how a business has been doing recently. This is especially true as many companies face added challenges because of the current economic environment.

Some lenders may ask you to show your personal and business assets and even cash reserves. They want to know about the capital assets of your business, including equipment and cash, and about the funds, investors have in your business.

Do you plan to apply for a loan secured by collateral? Then, expect lenders to ask for details regarding your accounts receivable, commercial real estate, equipment, and inventory.

How to Increase Your Loan Approval Odds

You can collect information in advance to increase your loan approval odds.

As you collect all the necessary information before applying for a business loan helps save time. It also reduces the risk of omitting anything critical.

The amount of information you need to provide varies by the financing type. Here are the commonly requested pieces of business information:

• Business name
• Business street address
• Date the business moved to the current address
• Business tax ID number
• Business phone number
• Date the business was established
• Number of employees
• Date the business was acquired by the current owner
• Annual gross sales
• Annual net profit
• List of outstanding obligations, if any, like monthly payment, credit limit, and current loan balance
• At least 2 years of business tax returns
• Information on collateral, including commercial real estate, equipment, inventory, and accounts receivable

Meanwhile, lenders might require the following information about the controlling manager, guarantor, and business owners:

• Name and title of someone opening the account
• Name and address of the entity for the account
• Residence status and monthly housing payment
• At least 2 years of personal tax returns
• Personal financial statement
• Personal household income
• Certification that the information provided on the controlling manager or beneficial owner is accurate
• Name, date of birth, country of issuance and passport number (foreign citizens), Social Security number (US citizens), country of citizenship, residential address, percentage of ownership, and country of residence for each controlling individual and beneficial owner

How Long It Takes to Process the Loan Application 

Every situation of the borrower is different. This means approval and funding time frames may vary. For example, a line of credit takes 3 to 4 weeks, while a commercial mortgage takes up to 60 days. The process will take longer if the lender requests additional information or documentation.

Do you want to stay updated with the latest small business loan process? How will decreased small business loan approval rates impact your financial or business situation? Feel free to talk to experts from GoKapital.