Big bank approvals of small business loans are as high as they have ever been (at a record high of 27.5%) in the 21st century’s post-recession era, according to the latest Biz2Credit Small Business Lending Index™ (May 2019 figures) released this week. Further, almost half (49.9%) of small business loan applications at small banks are being granted. Many of these loans are SBA Loans.
Whether you are a small business owner applying for traditional bank term loans or for an SBA loan, in most cases the funding will be a variable rate loan. What bodes well at the moment is that Federal Reserve Chair Jerome Powell recently signaled that the central bank is looking at recent economic developments closely and may “act as appropriate” to continue the current expansion.
Experts are predicting that the Federal Funds rate could drop by three-quarters of a point in the next 12 months and fall to as low as 1.75% from the current target range of 2.25 to 2.5%.
In fact, according to a new Wall Street Journal survey, nearly 40% of the 46 economists polled anticipate that the Fed will act in July, while roughly 30% expect a rate cut in September. This news comes even though the overall economy really still is quite robust. For instance, the NFIB Small Business Optimism Index increased in April, the last month reported by the NFIB, to a historically strong level. Profits are still trending upwards, and expectations for sales, business conditions, and credit conditions all improved, according to the NFIB Small Business Optimism Index.
Business owners who qualify for traditional term loans should be able to secure funding at very attractive rates from banks. Entrepreneurs who qualify for SBA-backed loans – usually from smaller banks – will likely secure funding at slightly higher rates than term loans but at longer payoff periods. If you have good credit scores, good lending times may get even better.
Beth Goldberg, SBA New York District Director, said that SBA has guaranteed nearly $600 million in small business loans so far in FY 2019 in the down-state New York area.
“Many small business owners are unaware that they can finance the purchase of their own commercial condo or co-op for as little as 10 percent down with SBA’s 504 program. In a robust economy like what we’re seeing today, this is a perfect time for entrepreneurs to revisit their business plans and think about if an equity position in their own space is an option going forward.”
Non-bank institutional lenders, a growing force in the small business lending marketplace, offer similar interest rates to banks and approved 65.5% of the funding deals they were offered in May.
Two categories of lenders are still somewhat stagnant, according to Biz2Credit’s research. Loan approval rates among alternative lenders dropped one-tenth of a percent to 57.1% in May, down a notch from 57.2% in April. Because the banks are lending aggressively and can offer better rates and terms, alternative lenders have declined slowly but steadily this year. Additionally, banks tend to receive applications from higher quality borrowers, and they offer lower interest rates because default rates are so low at the moment.
Credit unions again stayed at a record low 40.1% of loan applications in May, according to the Biz2Credit Index. Credit unions are looking for ways to expand, including partnering with the SBA on small business loans.
According to a recent Federal Reserve report, credit unions are usually not considered the first option for small businesses in need of capital or other financial services. In fact, the National Credit Union Administration (NCUA) and the SBA recently signed a deal aimed at increasing SBA lending by credit unions. The two organizations plan webinars and other events in hopes of expanding credit unions’ role in small business lending.
Partnering with the SBA is a good step for credit unions. However, they still are lagging in digitization, which hurts them and because Millennials are less willing these days to walk into a credit union and fill out a membership applications; they much prefer to do things on their smart phones.
Furthermore, credit unions are still handcuffed by the Member Business Lending cap, which limits their loan approvals to 12.25% of their assets. Until this changes – if it ever changes – credit unions will not be able to make big gains in small business lending.
The bottom line is that companies in search of capital have many attractive options right now. If they are ready for startup or expansion funding, now is as good a time as ever.
Source: Variable Rate Loans Become More Attractive For Small Businesses As Fed Mulls Rate Cut
By Rohit Arora, Contributor
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