Jeanna Barrett is currently Head of Inbound & Content Marketing for Kabbage, which pioneered the first financial services data and technology platform to provide fully automated small business loans. Kabbage has grown to become the #1 online provider of business working capital and is a Forbes Top 100 Most Promising Company.
Small business loan approval rates by big, traditional banks reached post-recession highs this year, according to Biz2Credit’s Small Business Lending IndexTM. Their online business lending survey of 1,000 businesses, reported that big banks approved 22 percent of the loan applications from small businesses, up from 20 percent in 2014.
And, that same survey reports that nearly 50 percent of small business loan applications submitted to small banks were approved in January 2015. Experts say this new high is fueled by low interest rates and banks settling into the economic recovery.
The Bad Days
The lending environment for small businesses was dealt a severe blow during the decline of financial markets in 2007 and a dramatic downturn in the fall of 2008. That’s when the U.S. economy officially entered into a recession. Banks that survived were dealing with tight lending conditions that reduced the money available for small business loans. Many borrowers saw their personal credit scores decline during this economic distress, which further reduced their chances of getting a bank loan.
The Road to Recovery
Economists say the road to economic recovery began in the second quarter of 2009 and by 2012 credit flow to larger businesses had returned to pre-recession levels. But it took longer for that recovery to make its way to small businesses. During that time though, businesses that survived were able to build good credit, which can be capitalized now in the loan application process.
The Federal Reserve reports that 22 percent of the small businesses they surveyed in the third quarter of 2014 had applied for credit and 54 percent of them were approved. Those numbers include not only applications to large and small traditional banks, but also online lenders. For the purpose of this research, the Federal Reserve considers a business with fewer than 500 employees a small business. The highest approval rates for loan applications to small businesses came from small, regional, or community banks and not from the big, national banks.
How Much Money is Being Borrowed?
So how much money are small business owners borrowing from banks?
The Federal Reserve survey reports that less than half of the applicants asking for $100,000 were approved, and most business owners were looking for a line of credit instead of a lump-sum loan. The primary reason for borrowing money was to expand the business. The survey also found that approved borrowers were likely to be the businesses that were larger in both employees and revenues. The smallest businesses were still less likely to be approved for a bank loan. When it came to companies with revenues of less than $1 million a year or ones that had been in business fewer than five years, the majority were turned down for loans.
So, while surveys might be showing that banks are approving more loans, it could still be challenging for smaller businesses or younger businesses to obtain a loan.
How to Share in the Loan Love
So if the banks are lending out more money – can your business get a share of the loan love that banks are showing? The Small Business Administration (SBA) says this is what loan officers look for:
- If there is a sound business purpose
- If the businessperson has strong character
- If the business has the ability to repay the loan and maintain personal and business assets
Choose carefully which traditional lenders to approach about a small business loan. Your list should include banks you are a customer of or have done business with in the past. Pay close attention to the information the bank needs, including the specific documentation that is needed to process a loan application. Many applications are delayed or denied because of incomplete information. And prepare yourself for the time it will take to apply for the loan. The Federal Reserve survey says that the average bank loan application takes 24 hours to complete, and you could wait up to three weeks for approval.
Credit is King
Even if banks are loosening their fists a bit and handing out more money to small businesses, they still want those loans to go to creditworthy customers. Of the small businesses in the Federal Reserve survey that were turned down for financing, 45 percent said they were told they had been rejected because of bad credit.
If you’re looking to expand your business with an infusion of cash, this may be a good time to give a bank loan a try. There is more money flowing through the credit pipeline than there was a few years ago, following the economic slowdown.
However, you might still experience challenges if you fit into one of these buckets:
- Your business revenue is less than $1 million a year
- You have not been in business for five years
- You have less-than-favorable credit
If any of these sound like your business or you don’t find just the right fit with a traditional bank, take a look at online lending sources like Kabbage. We look at your business health as a whole using your business data, not just a credit score and high revenue.
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