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Why Small Business Loan Approval Rates Are Climbing At A Snail’s Pace


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

Small business loan approval percentages at big banks ($10 + in assets) increased from 14.2% in November to 14.3% in December, and small banks’ approvals also rose from 19.9% last month to 20.1% in December, according to the latest Biz2Credit Small Business Lending Index™.

Approval percentages also climbed at non-bank lenders. Institutional lenders approved 24.9% of funding requests in December, up one-tenth of a percent from 24.8% in November. Alternative lenders’ approval rates 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. Big banks approved 28.2% of loan requests, while small banks approved more than half (50.6%) of loan requests they received in December 2019. Non-bank lender percentages 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%.

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Following the economic shock of the pandemic, approval percentages are rising slower than anyone hoped. Loan approval rates remain far below pre-COVID approval levels of just two years ago.

Total nonfarm payroll employment rose by 199,000 in December, and the unemployment rate declined to 3.9%, according to the Jobs Report released by the U.S. Bureau of Labor Statistics on Friday, Jan. 7, 2022. Employment continued to trend up 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 PPP, bank activity in small business lending has been 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 should pick up this year with higher rates in place.

At his confirmation hearing for his second term before Congress on Tuesday, Jan. 11, Federal Reserve Chair Jerome Powell said he believes inflation has been caused primarily by supply chain issues and indicated that the central bank would focus its attention on curbing 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 50-year lows and the economic benefits were reaching those most on the margins. No obvious financial economic imbalances threaten the ongoing expansion, but this attractive picture turned virtually overnight as the virus swept across the globe. The initial contraction was the fastest and deepest on record. But the pain could have been much worse.

As the pandemic arrived, our immediate challenge was to stave off a full scale depression, which would require a swift and strong policy actions from across government. Congress provided by far the fastest and largest response to any post war economic downturn. At the Fed, we use the full range of policy tools at our disposal. We moved quickly to restore vital flows of credit to households, communities and businesses and to stabilize the financial system. — Fed Chair Jerome Powell at his confirmation hearing on Tuesday, Jan. 11, 2022

Powell said that these collective policy actions, as well as the development and availability of vaccines and American resilience, helped to cushion the economic blow spark a historically strong recovery. The Fed chair said that economy is expanding at its fastest pace in many years, and the labor market is again strong.

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However, challenges remain. The individual shutdown and the subsequent reopening of the economy were without precedent. While the economy has regained strength despite the ongoing pandemic, supply and demand issues are causing inflation.

“We are strongly 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 higher inflation from becoming entrenched.”

Financial markets don’t like uncertainty. Unfortunately, with COVID-19 and its variants still taking unpredictable turns, uncertainty persists right now. Normalcy has not returned because the virus hasn’t allowed it. Vaccination was expected to lessen the problem, but that hasn’t happened to the extent that most people hoped. It was not expected that the small business economy would stall for so long, and it was certainly not predicted that inflation would reach the levels seen today.

We couldn’t expect the era of extremely low interest rates to continue forever. Rising interest rates will drive up the cost of capital, but they will also entice banks to loosen the purse strings for small business owners who want to invest in their companies. After all, what good is having low interest rates when institutions haven’t proven very willing to lend at those stated rates?

Some businesses are doing well, despite the pandemic: IT, financial services, and anything that does not require a lot of human interfacing. Other industries, including hotels, entertainment venues, restaurants and cruise lines are still struggling to overcome labor shortages and COVID’s negative impacts on the economy. Until the coronavirus gets under control, it will take a while for these industries to rebound fully.

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