Historically, there have always been fluctuations in big bank lending to small businesses. Big banks may adjust their lending strategies depending on the overall economic climate, regulatory changes, and other factors. With current interest rates remaining high and the threat of a recession still looming, banks have become increasingly wary of the economic forecast. Today, they tend to be more risk averse, tightening their lending standards and generally making it more challenging for small businesses to access loans.
Recent Federal Reserve data shows that application rates for traditional financing amongst small businesses have continuously declined in recent years, falling to 34% in 2021. And, as big banks, especially, have adopted more stringent approval criteria, the few small businesses that did apply for financing were less likely to receive the funding they sought, with only 31% receiving full funding. With these low approval rates, many small businesses opt to apply for financing through online lenders like SmartBiz®, or even seek alternative financing options like crowdfunding or peer-to-peer lending.
In addition to current economic conditions, a few other trends are making it harder for small businesses to obtain the financing they need through traditional sources.
Local community banks losing ground to large lenders
Over the past two decades, the number of community banks has declined by about 50% due to mergers and acquisitions, bank failures, and higher regulatory costs. Large financial institutions currently dominate the banking industry, managing more than 70% of total assets, compared to 42% in 2003. These institutions control over $16 trillion in assets, while community banks control only $3.2 trillion. Small business lending is generally the bread and butter of local banks. As community banks disappear, there are fewer lenders who focus on small business lending and fewer resources devoted to it.
Banks that do SBA lending are focused on larger loans
The SBA reports that lending has returned to pre-pandemic levels, with nearly 47,700 7(a) loans given to small businesses in 2022. In total, 68% of these loans (32,152) were small-dollar loans of $350,000 or less, with more loans under $150,000 in 2022 than in both 2021 and 2020. Even though these numbers are increasing, the SBA’s average loan size is $538,903.
Size does really matter to some banks
When it comes to small business lending, size does indeed matter to some banks. Many small regional lending institutions have minimum loan size requirements. Generally, borrowers need to be seeking at least a $10 million loan before they will attract the attention of such lenders.
Alternatives to traditional lending
The void in bank lending has spurred the growth of alternative lending, though many of these lenders charge high rates. However, companies like SmartBiz are bucking the trend by offering smaller SBA loans under $350k with a fast process, low rates, and low monthly payments. We’ve funded over 230,000 entrepreneurs and are committed to providing affordable financing options and the support you need to succeed. See our current interest rates and find out if you pre-qualify without affecting your credit score1.