Why the Big Banks Are Lending to Small Business

As we begin the New Year, the prospects for small businesses in search of capital seem to be brighter than they were even a year ago. Last year was a good year for small business lending, and 2014 looks to be better. A big reason is because non-SBA loans by big banks are on the rise.

As I see it, there are several causes:

Improvement in the overall economy

According to the Biz2Credit Small Business Lending Index, the small business loan approval rates at big banks ($10 billion+ in assets) increased 17.6% in December 2013 from 17.4%. Further, in a year-to-year comparison, lending approval rates at big banks have increased nearly 20%.

One primary reason the big banks are opening the purse strings is because their loan officers typically look at a potential small business borrower's last 3 years of profitability. Lending from big banks dried up in 2009 and 2010, as the recession hit many small business hard. As their revenue figures dropped, so did their opportunity to secure capital.

However, 2011-2013 were rebound years. Banks have seen healthier balance sheets from potential borrowers, and are now more willing to lend than they were during the credit crunch.

Non-SBA loans require less paperwork and are approved faster

Increasingly, creditworthy borrowers are applying and receiving small business loans at big banks – which wasn’t the case during the summer of 2011. Good news travels fast, and the big banks have brand names that consumers recognize.

Borrowers are opting for non-SBA loans because these loans require less paperwork and are typically processed 7 to 10 days faster than SBA loans.

Meanwhile, small business loan approvals at small banks, which generally have been focusing on SBA loans in recent months, dipped to 48.7% in December -- a full percentage point from the previous month. Despite experiencing an uptick in loan approval rates in November, approvals at small banks have stalled, in part because of the backlog of SBA loan processing -- fallout from the government shutdown.

Further, big banks are becoming more active in small business lending due to Dodd Frank regulations. The aggressiveness of the big banks comes at the expense of the smaller ones.

Alternative lending remains strong

Non-bank "alternative lenders" -- microlenders, cash advance companies, and others -- continue to be a strong player in small business lending. More than two-thirds (67.3%) of funding requests are approved by alternative lenders, who picked up the slack from the SBA slowdown and are now offering more lucrative terms to borrowers. Thus, borrowers are more willing to go to them for funding than in previous years.

I predict that the non-SBA lending boom will continue as the year progresses. More players continue to enter the marketplace, including yield-hungry investors, such as insurance companies, that look to get into the small business lending game. The successful ones are technology savvy players who make the online loan application process quick and easy. They should do well in 2014.

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.