Small Banks Are Making a Big Impact

Some welcome economic news for entrepreneurs: Banks are getting back into small business lending.

According to my company's latest Biz2Credit Small Business Lending Index, a monthly analysis of 1,000 loan applications on Biz2credit.com, approvals in June by big banks ($10B+ in assets) jumped to 11.1 percent from 10.6 percent in May 2012. The figure dwarfs the slim 8.9 percent approval rate in June 2011. The big banks have been under fire to increase small business lending and are now beginning to close more and more deals. Citibank is among the large lenders that have increased their loan approvals for small companies.

Small banks are the big story of late. Their loan approval rate increased to 47.5 percent in June 2012, up two percentage points from 45.5 percent in May 2012 and up five percentage points from the 42.5 percent rate in May 2011. Local and regional banks are making a lot of SBA 7(a) express loans, which used to be the bailiwick of the large banks. Mid-sized banks, such as Sovereign, which has many branches in New York, have really picked up their efforts in small business lending and are pursuing the market aggressively. 

The June 2012 loan approval rate of credit unions fell to 55.8 percent, down from 57.6 percent in May. Some credit unions reported that they had reached their yearly lending limit, which currently is 12.25 percent of total assets. Senator Mark Udall (D-CO), has introduced the Credit Union Small Business Jobs Bill (S. 2231) that would raise the credit union business lending cap to 27.5 percent of total assets from the current figure of 12.25 percent. By raising the cap, credit unions would be able to increase the number of small business loans they make. Keeping the limit in place hinders access to capital, especially since credit unions have become increasingly active in the small business lending space this year.

Alternate lenders also decreased, dropping their lending approval rate to 62.9 percent from a peak of 63.2 percent in May 2012. When traditional lenders get back into the game it impacts the alternative funders, such as factoring and merchant cash advance companies, which generally charge higher interest rates than banks do.

If banks are lending, small business owners are less likely to look for other options.  When they get access to capital, small companies will grow and create jobs.  This bodes well for the economy overall.