Small Business Week and Commercial Lending Approvals

President Trump proclaimed this week Small Business Week.  The Small Business Administration (SBA) Administrator Linda McMahon has been working to expand opportunity for entrepreneurs and job creators around the country.  SBA is hosting a 3-day virtual conference starting on Tuesday.

Trump wrote in his Proclamation, “Small businesses are at the heart of our Nation.  Our country’s 30 million small businesses employ nearly 58 million Americans—48 percent of the labor force.  Each year, small businesses create tow-out-of-three net new, private-sector jobs in the United States.”   In addition to ongoing regulatory rollback across the Federal government, the U.S. now operates under a globally competitive tax system for the first time in decades, according to Commerce Secretary Wilbur Ross.

Clearly, one of the largest players on the field of small business success are lenders.  Have you ever wondered of all the business loan applications given to financial institutions, how many are approved?  Biz2Credit keeps a Small Business Lending IndexTM.  This is a monthly survey of more than 1,000 credit applications from small businesses on

In the category of large banks with assets exceeding $10 billion, approval rates for March 2018 reached 25.5% of applications, which happens to be a high point.  One big factor here is an increasing direction of interest rates.  As rates increase, small business loans are much more profitable to a big bank since their cost of capital has not changed.  A small rate hike could mean multi-millions more for the bottom line.  Expect big banks with a large deposit base to be more aggressive in lending in the face of a strengthening economy and rising interest rates.

Small banks commercial approval rates held at 49% in March 2018, a slight decrease from the previous month.  Small banks tend to do more government guaranteed financing which stresses analysis of the previous year’s tax returns.  There is typically a bit of a seasonal dip at this time of year when tax returns are due.

Institutional lenders like pension funds, insurance companies and CMBS lenders, reached a record 64.5% approval rate in March 2018.  Institutionals have made a strong foray into the commercial lending market as they found the credit defaults are low and the rates profitable.  One reason the approval rate is so high is that many requests are screened out before an application is made as the requirements are well established and easily made know to the prospect. 

Alternative, non-financial institution lenders play an increasing role in business finance.  The approval rate in March was 56.5% of applications, slightly down from the 58.4% approval in the previous year.  Approval percentages here have dropped every month for the past two years.  The cost of capital for an alternative lender is high and the rates are often high.  If a business is in a cash crunch, this may be one of the only options they have.

Credit unions approved 40.1% of the commercial loan applications they reviewed.  This is a 1/10% drop and a new record low on the Biz2Credit Small Business Lending Index.  This is also a drop of 60 bps from the previous year.  The analysis from the study is that much of the loans that went to credit unions in the past are now being funded by non-bank lenders.  The credit union industry needs to invest more into financial technology to become stronger in the commercial market. 

I think some of the issue here in our industry is the new regulations that require credit unions to “grow up” in their commercial lending with policies, procedures, technology, and talent to adequately mange the ongoing risk of a commercial lending department.  As you grow, we can be a valuable resource for your credit administration needs.

Quick Bite:  On April 28, NPR reported that Penn State University found that the 98-year-old Outing Club’s activities—hiking, backpacking, biking—to be too risky.  Other clubs that were shut down were the caving and scuba diving club.  In each case, the clubs were deemed to have an unacceptable level or risk in their current operating model. 

When asked more about this decision, the school cited concerns over students going to areas where cell service is not available in the case of an emergency.  Heck, for some of us in the rural areas, we can find cell phone dead zones wherever we go!  Sometimes even in our own homes!  Seems like to me that our universities should be focused on moving students into adulthood instead of coddling them in a safety net as we would children.