Small business loan approval rates fell in March 2020

All categories of small business lenders take a nosedive as coronavirus wreaks havoc on economy

Until the coronavirus pandemic hit the United States, small businesses were thriving and creating jobs, unemployment was at a 50-year low, consumer confidence was high, and in general the U.S. economy was sluggish. as strong as it has ever been before.

Businesses that needed cash for working capital or for expansion plans were usually able to get it. For example, the approval percentage for small business loan applications at big banks ($10 billion+ in assets) was at a post-recession high of 28.3% in Feb 2020. A month later, approvals dropped to only 15.4% of the big banks, a drop of almost 50%, according to the latest Biz2Credit Small Business Loan Index.

It’s a stunning fall that wasn’t entirely unexpected. In addition, the approval rate at small banks dropped dramatically, from 50.3% in February to 38.9% in March. What is devastating about the drop in lending at regional and community banks is that these small banks have long been a good source of finance for businesses. Although they no longer approve more than they deny, business owners are reaching out to them because they are likely to provide financing through SBA loans.

As the coronavirus-related economic crisis continues, smaller banks will lead the charge to help businesses get back on their feet. We’ve seen this before since Community Banks made such a strong showing on day one of the CARES Act Paycheck Protection Program (PPP) initiative.

During the initial phase of PPP lending, we saw some of the big banks, such as Bank of America, do a lot of lending. What was not well publicized was the fact that a significant percentage of these loans were made to companies with which the banks already had financial relationships.

When you think about it, that makes sense. A large bank will naturally seem to me more willing to lend to a company that owes it a mortgage on the building it occupies and the credit cards the bank has issued to it. If a corporate client goes bankrupt, banks would be forced to seize the property and lose repayment of credit card debt.

Since the government backs these loans, there is little risk for the big banks, which already had plenty of incentives to lend to their own customers. Unfortunately, this has left many mom-and-pop type businesses scrambling for funding.

The approval percentage for credit unions fall from what was already a record low of 39.6% in February to 23.2% in March. Credit unions were struggling in the business loan market before the coronavirus hit. With the speed needed to breathe some life into businesses right now, unions are unlikely to be at the forefront of lenders. However, credit unions that have upgraded their digital capabilities or partnered with FinTech companies are way ahead of their competitors, especially now.

With business closures and layoffs due to the coronavirus rocking the economy, many sectors of the economy have been rattled, including restaurants, hotels, airlines and other travel-related services. A remarkable 6.6 million Americans filed for unemployment in the week ending March 28, according to the Bureau of Labor Statistics as of Thursday, April 2. In addition, according to the employment report released on Friday, April 3, 2020, significant declines also occurred in health care and social assistance, professional and business services, retail trade and construction.

Implementing the CARES Act PPP program passed by Congress and signed into law by President Trump was initially difficult. On the first day of the program, some of the biggest banks, such as Wells Fargo, weren’t ready to start offering PPP loans. Additionally, although thousands of applications have been submitted and approved, the money is still not in the hands of business owners who are in desperate need of funding.

Government agencies are not used to moving at breakneck speed. The big problem is that up to 75% of small businesses could go bankrupt if they don’t receive cash within the next 60 days. Even willing lenders, such as community banks that process SBA loans, are struggling to get money for struggling businesses.

On Wednesday evening, the SBA released an application form allowing non-bank lenders (FinTechs) to participate in the Paycheck Protection Program. It comes after small business owners across the country became frustrated because they were unable to submit emergency loan applications through their banks. Allowing FinTech lenders to get involved will help speed up the process and the number of options available to companies seeking PPP funding.

The amount of information available can be overwhelming. Fortunately, websites, such as CARESActSmallBusiness.info, have sprung up to offer funding information for businesses in need of working capital during the coronavirus pandemic.