Small business loan approvals drop at big banks
According to the latest Biz2Credit Small Business Lending Index™, the approval rates of small business loan requests at big banks ($10 billion+ in assets) fell from 13.3% in July to 13.2% in August. This is a nearly two percent drop from August 2022, when the approvals were at 15.1%. The index tracks monthly loan approval percentages for small businesses from over 1,000 lenders across the country.
The decline in lending by big banks has been going on for more than a year, as they face higher capital requirements and lower interest margins. Big banks have also been investing more in digital banking and reducing their branch networks, which may affect their relationship with small business customers.
Jamie Dimon criticizes stricter capital rules
One of the factors that may contribute to the credit crunch at big banks is the proposal of banking regulators to increase the amount of capital that lenders have to hold in reserve. The proposal is part of the Basel III framework, which aims to enhance the resilience of the global banking system after the 2008 financial crisis.
However, some bank executives have expressed their opposition to the proposal, arguing that it would limit their ability to lend and support economic growth. Jamie Dimon, CEO of JPMorgan Chase, the nation’s largest bank, sharply criticized the idea at an industry conference in New York and warned that stricter capital requirements could lead to a slowdown in lending.
He called the proposals “hugely disappointing” and said that they would make it harder for banks to compete with non-bank lenders and fintech companies. He also said that the regulators were not taking into account the impact of the COVID-19 pandemic on the banking sector and the economy.
Small businesses turn to alternative sources of funding
As big banks become less willing or able to lend to small businesses, other sources of funding have emerged or expanded their market share. According to the Biz2Credit index, loan approval percentages rose at regional and community banks and non-bank lenders in August.
Regional and community banks approved 18.9% of small business loan applications in August, up from 18.7% in July and 18.4% in August 2022. Non-bank lenders, which include online lenders, accounts receivable financers, merchant cash advance providers, and microlenders, approved 24.5% of funding requests in August, up from 24.3% in July and 23.5% in August 2022.
These alternative lenders offer more flexibility, speed, and convenience than traditional banks, and may have less stringent underwriting criteria or collateral requirements. They also use technology and data analytics to assess the creditworthiness and potential of small business borrowers.
However, these advantages may come at a cost, as some alternative lenders may charge higher interest rates or fees than banks, or impose shorter repayment terms or more frequent payments. Therefore, small business owners should carefully compare their options and understand the terms and conditions before applying for a loan from any source.
