Trends in small business lending for 2015
Last month, the Fed published a report about the trends in small business lending stating that lenders should expect to receive a larger number of loan applications in 2015 compared to 2014. This would mark a fourth consecutive year of increase since that number was 53,848 in 2012, 54,016 in 2013, and 58,000 this year.
However, it’s important to note that this increase is by no means the result of an increase of the volume of small business loans provided by the federal government. Indeed, according to Small Business Administration figures, financing available to SBA borrowers has been declining since 2011.
What exactly is happening?
At first glance, it might seem that less money would now be lent to businesses that have restricted access to financing, but a closer look at the data reveals a different story. A larger number of small firms are seeing their loan applications get approved because the amount of money that is allocated to each one of them has slightly decreased.
Lending standards have been lowered
The main driver of the increase of approved loan applications for small businesses is the softening of lending standards set by financing institutions. While the Federal Reserve has been encouraging such a move since 2009 in an effort to boost economic activity by providing guarantees, certain banks have done little to facilitate access to their funds. For instance, only the eligibility criteria for commercial and auto loans have been lowered to date.
Is there a better alternative to SBA loans?
The short answer is no. SBA loans still remain the top financing option for small business owners. Indeed, the fact that they are very affordable and accessible to companies that have insufficient credit history makes them particularly attractive.
Nevertheless, borrowing entities need to make rational decisions when considering taking out these loans. As you might know, SBA loans generally have a long maturity period. To be used optimally, they should never outlive the investments that they are financing.
By Alan Lee