Competition Lowers Interest Rates for Small Business Loans

The laws of supply and demand are working in favor of small business owners looking for capital in 2014.

Increasingly, banks -- both large and small -- and non-bank lenders are looking to fund deals. Banks sat on their assets (so to speak) during the credit crunch and over the past few years gradually returned to small business lending. Dodd Frank provisions and the slow rebound of mortgages caused them to rethink why they would not lend to entrepreneurs. Fortunately, the purse strings are opening up.

Small business loan approval rates at big banks ($10 billion+ in assets) increased to a new high of 17.8% in January 2014, up from 17.6% in December 2013, according to my company's Biz2Credit Small Business Lending Index. Creditworthy borrowers are applying for small business loans at big banks and having them approved. This is good news. Increasingly, big banks are trying to enter this space, which is helping to keep interest rates historically low.

Small banks are now approving more than half of the loan applications they receive. Much of this is due to the popularity of the SBA Express program (loans less than $350,000) and SBA 7(a) program (loans between $350,000 - $5 million) that offer funding at attractive interest rates. Further, some credit unions are trying to get into SBA loan-making. The more players making capital available to small business owners, the better it is for borrowers.

Alternative lenders emerged as important players in small business lending in 2013, primarily because they make decisions quickly, thanks to their investment in technology. They also tended to charge much higher rates than banks. Because so many non-bank lenders entered the small business credit market, they were compelled to offer lower interest rates. More good news for small business owners!

Because the economy has improved and small business owners have been doing better since the post-recession credit crunch, they often are not as desperate for capital. Thus, the imperative for speed goes down while the priority tends to become securing more attractive interest rates.

Lastly, institutional lenders -- a category that includes credit funds, insurance companies, family funds, and other yield-hungry, non-bank financial institutions --  are starting to become important players in  small business lending. They typically offer more competitively priced loan products -- a bit higher than banks, but much lower than speed-focused alternative lenders that charge up to 30-50% for short-term money.

The emergence of institutional lenders into the marketplace makes vast amounts of long-term, stable money available to small business borrowers. I predict that in 2014, as more credit funds, insurance companies, and others enter the industry, borrowers will be able to secure small business loan products at attractive interest rates and terms. 

My advice to entrepreneurs is to use the Internet and search for the best small business lending deals. There is a lot of information available that can help keep the cost of securing capital reasonable this year.

Rohit Arora is co-founder and CEO of Biz2Credit, an online resource that connects 1.6 million small business owners with 1,200+ lenders, credit rating agencies and service providers such as CPAs and attorneys via its Internet platform.  Since 2007, Biz2Credit has secured more than $1 billion in funding for small businesses across the U.S.  Follow Rohit on Twitter @biz2credit.