SMEs prefer alternative lenders to large banks for loans, study shows

By Puja Sharma

Small business loan approval percentages at big banks dropped from 14.7% in October to 14.6% in November, the second lowest total in 2022, according to the latest Biz2Credit Small Business Lending Index. Approval percentages of business loan applications at small banks declined from 21.2% in October to 21.1% in November.

Similarly, credit unions granted 20.3% of loan requests in November, a decrease from October’s figure of 20.4%. Among other non-bank lenders, approval percentages of alternative lenders rose from 27.3% in October to 27.4% in November. Institutional Investors also showed an increase in approval percentages, going from 25.7% in October to 25.8% in November.

A holistic approach to digitalisation- While customers still prefer human guidance, the newer generation prefers automation and chatbots for their banking needs, and with LendTech such day-to-day banking experience is getting seamless.

Future Collaborations – Banks and financial institutions are already partnering up with FinTechs and Tech vendors to provide an end-to-end customer experience, and this will continue to grow within the lending ecosystem.

“With seemingly ever-rising interest rates, small businesses are taking a wait-and-see approach to borrowing. All eyes will be on what the Federal Reserve announces at its next meeting. Most experts anticipate another 25bps increase in interest rates,” said Rohit Arora, CEO of Biz2Credit and one of the nation’s leading experts in small business finance. “While rates continue to rise, the economy has not yet reaped the benefits of tighter monetary policy as a means to curb inflation.”

Total nonfarm payroll employment increased by 263,000 in November, and the unemployment rate was unchanged at 3.7%, according to the Jobs Report released by the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in leisure and hospitality, health care, and government. Employment declined in retail trade and transportation and warehousing. Many of these positions are created by small businesses, which are responsible for the lion’s share of new jobs in the private sector economy.

AI and data analytics have made it easier for small businesses to access FinTech lending. Traditional lenders consider several factors, including liquidity, credit score, and tax returns. The data needed to support a loan request for many small businesses may be insufficient at the beginning of their growth. The use of real-time data and the analysis of other data points have helped small credit lenders expedite the processing of credit applications. New opportunities are being presented to previously declined businesses.

In addition to reducing the processing time for many lending functions, FinTech apps have enabled better interest rates, more accurate results, and more fair approvals. Several FinTech lending platforms use a P2P platform that allows for all transactions to take place virtually.

Data and open banking can also be used by lending apps to gather accurate information about the borrower’s financial habits. With this method, lenders have a clearer picture of their creditworthiness without prejudice.

“Inflation and high cost of capital remain among the top concerns for small business owners,” Arora said. “There is a lot of uncertainty for small businesses in the current economy. While we seem to have recovered well from the worst depths of the COVID pandemic, cost pressures — including rising wages, increasing costs of raw materials, and cost of capital — are putting a lot of pressure on small companies at this time.”