It’s a challenging time for firms in search of capital. Not only have interest rates continued to rise this year, but the largest sources of capital, big banks, are approving fewer and fewer requests. Money is expensive and hard to find.

Small business loan approval percentages at big banks ($10 billion+ in assets) dropped from 13.4% in June to 13.3% in July 2023, according to the latest Biz2Credit Small Business Lending Index™. Big bank commercial lending plummeted during the pandemic from a record 28.3% approval rate in February 2020. The numbers slowly rebounded for over a year until July 2022. However, over the past 12 months, small business loan approvals have fallen steadily.

There are several reasons for this decline. Interest rates have increased dramatically as the Federal Reserve has raised them in an effort to control inflation. On July 26, 2023, the Federal Open Market Committee (FOMC) announced another hike of 25 bps. Thus, over the past 18 months, rates have gone up 5.25 percentage points… and we may not have seen the end of interest hikes in 2023.

Additionally, because big banks often made commercial real estate loans to small businesses, deals have dried up because the cost of capital is so high at a time when the cost of property has soared in much of the country.

Additionally, regulators are looking to raise overall capital requirements at some of the largest banks by 2026. The banks are preparing for this now since many SMB loans carry 5-to-7-year terms. This is a challenge that big banks must brace for.

Where can business borrowers secure capital?

Fortunately, for businesses searching for capital, small banks saw another approval percentage increase from 18.8% in June to 18.9% in July. Regional and community banks historically process more government-backed SBA loans and have a heritage of working making business loans in their local areas. Increasingly, these lenders are upgrading their technology both internally or via fintech partners to digitize the small business funding process. This enables them to serve more clients.

Non-bank lenders remain a good source of capital at this point. The approval rates of Institutional investors increased from 27.1% in June to 27.3% last month, while alternative lenders improved from 29.1% in June to 29.3% in July. The figures for these lenders have increased for nine consecutive months as borrowers have turned to them for money while bank lending remains tight.

Alternative lenders are seeing more capital moved in their direction as investors, such as insurance companies, look for opportunities for higher yields against the backdrop of a new rate environment. Thus, these alternative providers have capital available to fund small business requests for financing.”

Approval rates at credit unions again stalled at 19.9% in July. Similar to the situation with banks, credit unions are facing challenges in soliciting deposits.

In preparation for the coming holiday season, businesses now begin ordering and paying for supplies and inventory. Many of them are having to scramble to find willing lenders, and at this point, speed is often as important as cost. This has opened up opportunities for non-bank lenders as bank lending has stalled. However, the cost of capital at these funding sources can be quite high. Borrowers must be judicious in what they order, how much it costsm and should plan carefully for the coming months.

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