Business loan

Why small business loan approval rates are climbing at a snail’s pace

Although the approval percentages of banks and non-bank lenders (institutional lenders, alternative lenders and others) have risen steadily over the past 12 months, the rebound in small business lending is far from robust.

According to the last Biz2Credit Small Business Loan Index.

Approval percentages also climbed among non-bank lenders. Institutional lenders approved 24.9% of funding requests in December, up one-tenth of a percent from 24.8% in November. Approval rates for alternative lenders rose from 25.8% in November to 26.1% in December. Credit unions approved 20.6% in December, the same percentage as in the previous two months.

Two years ago, bank approval percentages were about double what they are today. Large banks approved 28.2% of loan applications, while small banks approved more than half (50.6%) of the loan applications they received in December 2019. The percentages of non-bank lenders in 2019 were even higher: institutional lenders approved nearly two-thirds (66.2%) of applications, alternative lenders granted 56.3%, and credit unions approved 39.7%.

Following the economic shock of the pandemic, approval percentages are increasing more slowly than hoped. Loan approval rates remain well below pre-COVID approval levels of just two years ago.

Total non-farm payroll employment rose by 199,000 in December and the unemployment rate fell to 3.9%, according to the jobs report released by the U.S. Bureau of Labor Statistics on Friday 7 January 2022. Employment continued its upward trend in leisure and hospitality. , in professional and business services, in manufacturing, in construction, and in transportation and warehousing, according to the report. Many of these jobs are created by small businesses.

After the PPP, banking activity in small business lending was slow. In 2022, however, with government lending programs ending and interest rates expected to rise, it will become more lucrative for banks to lend again and hopefully they will. Small business lending activity is expected to pick up this year with higher rates in place.

To his confirmation hearing for his second term before Congress on Tuesday, January 11, Federal Reserve Chairman Jerome Powell said he believed inflation was primarily caused by supply chain issues and indicated that the central bank would focus its attention on the fight against inflation. Raising interest rates is one of the tools in the Fed’s arsenal.

“On the eve of the pandemic, the US economy was enjoying its 11th year of expansion, the longest on record. Unemployment was at a 50-year low and the economic benefits were reaching those furthest from the margins. No obvious financial economic imbalance threatens the ongoing expansion, but that rosy picture changed virtually overnight as the virus swept the world. The initial contraction was the fastest and deepest ever recorded. But the pain could have been much worse.

When the pandemic arrived, our immediate challenge was to avoid a full-scale depression, which would require swift and strong political actions from across government. Congress provided by far the quickest and most significant response to any postwar economic downturn. At the Fed, we use the full range of policy tools at our disposal. We acted quickly to restore vital flows of credit to households, communities and businesses and to stabilize the financial system. — Federal Reserve Chairman Jerome Powell during his confirmation hearing on Tuesday, January 11, 2022

Powell said these collective political actions, along with the development and availability of vaccines and American resilience, have helped cushion the economic blow and spark a historically strong recovery. The Fed Chairman said the economy is growing at its fastest pace in many years and the labor market is once again strong.

However, challenges remain. The individual shutdown and subsequent reopening of the economy was unprecedented. As the economy has regained strength despite the ongoing pandemic, supply and demand issues are causing inflation.

“We are firmly committed to achieving our statutory goals of maximum employment and price stability,” Powell said. “We will use our tools to support the economy and a strong labor market and to prevent rising inflation from taking hold.”

Financial markets do not like uncertainty. Unfortunately, with COVID-19 and its variants still taking unpredictable turns, uncertainty persists at this time. Normality did not return because the virus did not allow it. Vaccination was expected to alleviate the problem, but it didn’t happen to the extent that most people hoped. The small business economy was not expected to stagnate for so long, and inflation was certainly not expected to reach the levels seen today.

We could not expect the era of extremely low interest rates to continue indefinitely. Rising interest rates will drive up the cost of capital, but will also cause banks to loosen the purse strings for small business owners who want to invest in their business. After all, what’s the point of having low interest rates when institutions haven’t shown much willingness to lend at those quoted rates?

Some businesses are doing well, despite the pandemic: IT, financial services, and anything that doesn’t require a lot of human interfacing. Other industries, including hotels, entertainment venues, restaurants and cruise lines, are still struggling to overcome labor shortages and the negative impacts of Covid-19 on the economy. Until the coronavirus is brought under control, it will take some time for these industries to fully rebound.