Approval rates rise for small business lending
Approval rates for small business lending continue to grow and those in finance say it is all thanks to a strong economy.
But traditional lenders are rethinking their lending strategies as more nontraditional players are taking advantage of the strong economy and playing the field.
Loan approval ratings for small business lending is growing. Banks are averaging 18% higher approval rating from the first quarter of this year than in 2011 nationwide. The US Small Business Administration footed over $25 billion in funding for small business loans across the country from 2017 to the start of 2018.
Frank Gallo, senior commercial lender for Tropical Financial Credit Union, says technology is one contributing factor for the growth in SBA loans: “The technology advancement in our world lends a hand in the ability of lenders to gravitate towards and process these SBA-guaranteed loans.”
Businesses themselves are in a healthier state and able to grow too, he says.
Jose R. Sevilla, University of Miami Business School professor of business analytics and technology, credits a growing economy for the increase in loan approvals.
He said, “The great numbers in employment and also the stability of the interest rates has given a big boost to small business lending.”
Local approval rating trends mirrors the nationwide growth. Apollo Bank’s Chief Lending Officer Odoardo Sbarra agrees with Professor Sevilla that the economy is a major factor.
He said, “With the economy doing well there are more businesses that are growing.”
Businesses and lenders are no longer worrying over last year’s interest rate hikes, and speculations of an economic downturn have died.
Mr. Gallo said, “When those interest rate increases or the prediction of those increases happen, everybody kind of says, ‘The economy is going to slow because we are increasing interest rates.’ That is not true. It’s something most economies go through.”
Mr. Gallo does predict that at some point lenders will slow their approvals: “I would expect lenders at some point in the future to start tightening up a little bit, not because there is something wrong with the economy, but because we want to make sure everyone is borrowing money at a rate where they are not going to put themselves in trouble.”
The majority of borrowing applicants in Miami tend to come from the tourism and service industries, but owners who themselves are a minority are not receiving as many approvals as their counterparts, the experts say. The most common loan requests come from boutique or niche hotels with limited cash flow and restaurants, but not all demographics are receiving the same rate of approval.
Professor Sevilla said, “Banks and nontraditional financial services look at the minorities having lower net worth. They do not have the most optimal location. They have a poor or low credit history.”
As a result of these factors, Professor Sevilla says, they are often rejected for a loan.
But business owners today have more options available to consider. Mr.Sbarra said, “If you are starting a small business or you have already a small business going, there are a lot of options for you to obtain the liquidity that you might need to go forward. In the past, that was not the case.”
Professor Sevilla says some traditional lenders are expanding their servicing scope. Credit unions, for example, he says, are not as focused on a particular niche industry but rather “are being more aggressive in taking up new business. You don’t necessarily have to be a member of the credit union to obtain their services.”
Borrowers opting for a credit union often see better rates offers than those provided by multinational banks and easier terms for obtaining credit.
Nontraditional lenders of many sorts are vying for borrowers. The peer-to-peer borrowing platform Lending Club, Kabbage, SBG Funding, and even GoFundMe are options borrowers are weighing to fund their business growth. But the ones making the biggest waves include Amazon, PayPal, and Square.
More financial lenders in the marketplace does not necessarily mean heightened competition – at least, not yet. Nontraditional players target specific potential borrowers or those rejected by credit unions and community banks.
Professor Sevilla said, “Their scheme of financing is totally different than when it comes to traditional banking or financing companies because you have to be involved with the company.”
He points to Amazon’s loan program for the company’s resellers. Professor Sevilla said, “It is usually for inventory, to replace your stock, so that you keep selling in Amazon. When you reach a level of sales, Amazon funding will invite you to apply for a loan.”
Victoria Guerrero, district director for the U.S. Small Business Administration South Florida branch, writes by email, “These alternative lenders have entered the space offering speedy turnaround times and easy collection methods. However, these lenders may not have the range of lending amounts that are available through traditional lending and with SBA-guaranteed financing. That is, with SBA, loans can go from as little as $500 with our microlenders and as high as $5M.”
Mr. Sbarra says nontraditional lenders are not a concern for community banks at this point, since many target microbusinesses involved in e-commerce. These borrowers are also those not typically able to get a community bank loan or often request too small an amount. They are not stealing away competition.
But nontraditional lenders are causing a stir in terms of growth strategies and investing in digital services. More credit unions, as an example, are pairing with a fintech lender that helps digitalize small business loan applications.
Mr. Gallo said, “All of these nontraditional lenders are forcing the credit unions and banks and every type of lender to get on the bandwagon and start putting money into online lending tools. Amazon is making everybody wake up, get on the boat, invest the money, and go digital.”