Small business loan approvals at banks and credit unions drop: A bad sign for economy

BY ROHIT ARORA

COMMENTARY

Here's some bad news for the economy. My company's Biz2Credit Small Business Lending Index, an analysis of 1,000 loan applications, found that loan approvals by big banks dropped from 10.9 percent in March to 10.6 percent in April and from the 11.6 percent approval rate last March. Additionally, small bank lending fell from 47.6 percent in March to 45.9 percent in April 2012.

Loan approvals made by credit unions decreased by 0.5 percent to 46.6 percent at a time when they are making a push to increase the lending limit to 27.5 percent of their assets. Alternate lenders remained flat as lower interest rate products have increasingly been introduced into the marketplace.

Another sign of the slowing economy is that the overall demand for small business loans in April was down by 5.4 percent slipping for the first time in a year. Further, the 12-month window for SBA's enhanced 90 percent loan guarantees concluded, which slowed SBA lending activity reported by banks that make SBA-backed loans. Additionally, the guarantee fee (usually 1-3 percent of the loan amount) was no longer waived, which increases the cost of taking out a loan.

The 90 percent guarantee fee in place for loan approvals granted between September 2010 to March 2011 were valid for 12 months. April 2012 was the first month of 75 percent guarantees combined with assessment of the 1-3 percent fee. This played a big part in the drop in loan demand and the reduced willingness of banks to grant funding requests.

The disappointing April jobs report, in which only 115,000 new jobs were created, when the expectation was much higher, is an indication that the economy is slowing down. High oil prices as well as the intensification of the European crisis have combined to cause both borrowers and lenders to proceed with caution. The flow of capital may be slowing down, which is a cause of concern.

Month	Big Bank ($10B+ assets) Approval %	Small Bank Approval %	Credit Union Approval %	Alternative Lenders Approval %
March 2011	11.6%	44.2%	48.8%	51.9%
April 2011	10.4%	44.6%	50.1%	53.6%
May 2011	9.8%	45.0%	51.2%	53.8%
June 2011	8.9%	42.5%	52.3%	54.9%
July 2011	9.8%	44.9%	53.4%	52.2%
August 2011	9.4%	43.8%	54.2%	58.0%
September 2011	9.2%	45.1%	55.5%	61.5%
October 2011	9.3%	46.3%	56.6%	61.8%
November 2011	10.0%	47.0%	57.0%	62.0%
December 2011	9.7%	47.1%	57.4%	62.2%

January 2012	11.7%	47.5%	57.6%	62.4%
February 2012	11.7%	47.6%	57.8%	62.5%
March 2012	10.9%	47.6%	57.9%	63.0%
April 2012	10.6%	45.9%	57.4%	63.0%

* Banks with more than $10 billion in assets are classified as "big banks."

* Banks with less than $10 billion in assets are classified as "small banks."

* Credit Unions are considered a category unto themselves in the Biz2Credit Small Biz Lending Index.

* The "alternative lenders" category includes accounts receivable financers, merchant cash advance lenders, Community Development Financial Institutions (CDFI), micro lenders and others.

Of all the categories of small business lenders, credit unions and alternative lenders (accounts receivable financers, merchant cash advance lenders, Community Development Financial Institutions (CDFI), micro lenders, and others) approve more than 50 percent of loan requests. Small bank lending dropped to its lowest level since September 2011. Big banks, still tight in their loan parameters, reject almost 9 out of 10 small business loan requests.

Biz2Credit's analysis also found that loan request amounts ranged from $25,000 to $3 million; that the average credit score was above 680, and that average-time-in-business was slightly more than two years.

Unlike other surveys, the results are based on primary data submitted by more than 1,000 small business owners who applied for funding on Biz2Credit’s online lending platform.

Rohit Arora is co-founder and CEO of Biz2Credit, an online resource that connects 1.6 million small business owners with 1,100+ lenders, credit rating agencies and service providers such as CPAs and attorneys via its Internet platform. Since 2007, Biz2Credit has secured more than $550 million in funding for small businesses in New Jersey and across the U.S.