Biz2Credit’s July Small Business Lending Index has highlighted recent patterns in SME lending.
The survey analyses its platform’s loan requests ranging from $25,000 to $3 million from companies that have been in business for more than two years and have a credit score above 680. The data is based on more than 1000 small businesses.
The survey shows that institutional lender (which AltFi assumes means non-bank financial institutions) approval rates have maintained their very slim lead over alternative lenders, having inched up from 61.4% to 61.7%, compared to AltFi’s unchanged 61%. Interestingly, AltFi lending to SMEs has fallen from 62.7% this time last year. Rohit Arora – Biz2Credit CEO – commented:
“Institutional investors are becoming a bigger part of the market, which can be seen by recent changes in business models from several large online balance sheet lenders…Some of our peers in the industry recently signed multimillion dollar purchase commitments or credit facilities with institutional investors.”
On alternative lenders, Arora continued:
“In the last few months… alternative lenders like cash advance and MCA players have become less competitive…these companies are charging higher rates and providing shorter terms to borrowers.”
Approval from small banks and credit unions fell slightly in July – with small banks’ falling 10 bps and credit unions taking a significant 80 bp fall. The two fell to 49.2% and 42.9% respectively. On these two points, Arora remarked:
“Small banks and credit unions are facing increasing pressure in the marketplace as more creditworthy borrowers are moving either to big banks or to institutional investors through online marketplaces to receive better terms and faster access to credit…To stem this tide, these smaller financial institutions must ramp up their online lending offerings and ultimately fund more borrowers.”
In the report, big bank approval rates continued to lag behind others, although continuing to climb. Approval was 22.4% this month – marking a year on year 100 bp rise. On this point, Arora said:
“The trend clearly shows that big banks are getting more aggressive in the small business lending space and are starting to invest money in digitizing their loan offerings. We have seen more instances of banks coming back in asset backed lending as well as commercial real estate lending markets and less so in working capital as of now.”
Alternative finance has been widely lauded for allowing SMEs to access credit that previously wasn’t available. It appears that big banks are beginning to react and direct more resources towards streamlining their SME services and competing in the space. No doubt that on current trends AltFi and institutional approval rates will remain significantly higher for the foreseeable future. However, perhaps in a year or so big banks may start hitting similar approval rates to their smaller counterparts.
Now in its sixth year, the AltFi London Summit returns on 18th March 2019 to 155 Bishopsgate. Last year proved to be a crucial turning point for the key players building the future of finance. Leading platforms launched oversubscribed IPOs, digital banks proliferated and mainstream financial institutions started their own disruptive propositions. With 2019 certain to be another landmark year, more questions will be asked by regulators with investor interest in disruption also poised for more rapid growth.