Approval rates for small business loan applications reached a record high of 27.5% at big banks ($10 billion+ in assets) in April, up one-tenth of a percent from March, while approval percentages at small banks jumped four-tenths of a percent to 49.8%, according to the latest Biz2Credit Small Business Lending Index™.
Approvals by banks of all sizes continue to climb steadily. The economy is still strong, and the optimism of entrepreneurs is high. Small business lending is as strong as it has ever been in the 21st century’s post-recession era.
Small bank approvals of business loan applications climbed from 49.4% in March to 49.8% last month. After February, the SBA wants the previous year’s tax returns to be part of the application. SBA lending is particularly important to smaller banks. Many of these banks are partnering with fintech companies in order to enhance their small business loan application process.
In an interview with American Banker, former SBA Administrator Karen Mills said that the next wave of the evolution of banking will be partnerships between fintech innovators and banks — particularly small banks. American Banker also reported that community banks and regional banks are worried about their ability to stay competitive because big banks are investing heavily in technology. For instance, JPMorgan Chase has spent an estimated $11 billion on technological upgrades, according to the article.
“We have come to a moment where banks want to partner with fintechs for technology and for platforms without developing it themselves,” said Mills, who has just written a new book called Fintech, Small Business and the American Dream. “They can access bank accounts, Amazon purchases, and eBay activity to determine if a small business is creditworthy.”
Mills watched the evolution of fintech from the front row as the SBA chief. In the immediate years after the financial crisis, the funding outlook for many small businesses was bleak. Fintech companies identified the gaps in the small business lending market and revolutionized the loan application experience for entrepreneurs looking for startup and expansion capital.
Online applications skyrocketed, and lending decisions are now made at record speeds, thanks to advanced data analysis. Instead of compiling mountains of paperwork and waiting weeks for a decision, tech savvy small business owners learned that they could apply online after working hours and on weekends, when it is more convenient for them. An added bonus is that decisions can be made quickly.
Banks that were behind the curve in developing their own technology now are partnering with companies like Biz2Credit that can enhance their digital lending capabilities. In this scenario, the borrowers, lenders, and fintech providers all win.
Fintech partnerships also allowed institutional lenders to become more active in small business lending. Yields are good, and default rates are low, two things that are attractive to them. In April, institutional lenders approved almost two-thirds (65.3%) of small business loan requests.
One category of lender that has suffered during the fintech era is credit unions, which have seen their loan approval percentages drop to a post-recession record low. Increasingly they are beginning to look for fintech partners to help them upgrade their technology. They must respond to the marketplace. Today’s customers — particularly Millennials — simply won’t take the time to walk in and become a member in order to fill out a loan application. Digitizing the process and enable them to apply for loans by using their smart phones could help turn the tide.
Overall, the good news for small business borrowers is that capital is flowing, the amount of time it takes to get it has decreased, and the economy still is ripe for small business growth. Business owners who stood on the sidelines may want to jump in now and apply for funding while rates are low and financial institutions are quite willing to lend.