March Drop in Loan Approval Rates at Big Banks Is a Cause for Concern

While the Feds have been touting the slight uptick in the economy, a recent report indicates that the flow of capital may be slowing. While the situation for small business seems to be improving since 2008, middle market companies remain cautiously optimistic on 2012 growth. Will the drop in loans by big banks affect small business lending? Whether via small banks or alternative sources for commercial financing, the article below claims that small business lending remains strong.

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Source: Small Business Trends, April 22 2012, by Rohit Arora

Small business loan approvals by big banks ($10 billion+ in assets) dropped to 10.9% in March, down from the 11.7% figure reported in February. This figure represents a 6.8% decline over a one-month period and from the 11.6% approval rate one year ago in March 2011.

According to the Biz2Credit Small Business Lending Index, small bank lending remained flat at a 47.6% approval rate, alternate lenders picked up slightly (0.5%) to a 63% approval rate, and loans made by credit unions barely increased (up 0.1%) to a 57.9% approval rate.

Big banks are always the most cautious, particularly when economic news is less than rosy. The March jobs report found that only 120,000 new jobs were created, significantly short of estimates of 300,000+ positions created. Meanwhile, the rising price of oil also makes borrowers and lenders wary.

So while the availability of small business capital has improved over the past 12 months than in 2009 or 2010, the flow of capital may be slowing, which is a cause of concern.

Big banks are still stringent in their loan parameters and approve loans at a lower rate than any other category of lender, despite promoting their efforts in the small business lending space.

This is disappointing news because for the past year lenders of all types had been steadily increasing the number of funding requests from small business owners that they granted. I am a bit concerned that the momentum in the last few months seems to have slowed, and business sentiment is turning cautious.

However, I am still cautiously optimistic that this is a temporary blip and not a start of a slowdown like what happened during second quarter last year when lending stalled after a good first quarter. The good news is that credit unions and alternative lenders continue to approve more than 50% of loan requests, and small bank lending remains strong.

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