Credit Unions and Local Banks Are Big in Small Business Lending

When is big small?

Big banks are shrinking in the small business lending space, while regional and local banks and non-bank lenders continue to approve a much higher percentage of loan requests.

The most recent Biz2Credit Small Business Lending Index, an analysis of 1,000 loan applications, found that approval rates of small business financing requests by small banks and non-bank lenders increased to their highest levels of the year during October.  Meanwhile, approvals by large banks during rose only slightly from their September levels. 

Loan approvals by smaller banks increased to 46.3 percent in October, their highest rate this year and an increase from 45.1 percent in September. Alternative lenders continue to fill the vacuum left by banks and traditional financial institutions. Credit unions, Community Development Financial Institutions (CDFI), micro lenders, and others approved 61.8 percent of funding requests, a rise from the 61.5 percent rate in September. 

Meanwhile, the approval rates at big banks (institutions with $10 billion+ in assets) climbed just one-tenth of a percent to 9.3 percent in October. In fact, small business loan approvals at big banks have not been above the 10 percent rate since April.

Big banks continue their reluctance to lend money. The causes of this cautiousness include the continuing global financial crisis, as well as U.S. policy uncertainty and the impact of Dodd-Frank Wall Street Reform Act, which tightened banking regulations. 

Deposits in credit unions are growing as people who were angered by big bank fees for the use of ATM cards decided to take their money and deposit it elsewhere. Credit unions are also marketing their services very aggressively, soliciting deposits and touting their small business lending. This impacts small business lending because now the credit unions have more money to lend, despite the 12.5 percent cap on loans to small business. 

Lobbyists for big banks are trying hard to stop legislation that would enable credit unions from increasing the percentage of their assets that can go to small business lending. In essence, Goliath is afraid of David. It will be interesting to see how this plays out.

The good news is that the economy seems to be getting a bit better and we can see some signs of recovery finally. This should be encouraging for small business owners.