As banks and alternative lenders start approving more small business loans, credit unions are facing growing competition for marketshare.
A recent study of approval rates of small business loans may indicate CUs are in danger of losing marketshare, according to Rohit Arora, CEO of Biz2Credit, which conducted the study.
Approval rates of small business loans improved slightly at credit unions in February 2015, but bigger players like the large banks and institutional lenders are increasing their share of this marketplace, according to the Biz2Credit Small Business Lending Index.
In February, credit unions approved 43.3% of small business loan applications, slightly up from the 43.2% figure from the previous month, based on a monthly analysis of 1,000 loan applications submitted by small business owners who applied for funding on Biz2Credit's online lending platform, which matches borrowers to financial institutions. Loans ranged in value from $25,000 to $3 million.
However, the approval rate has remained largely stagnant over the past year, the survey found, ranging from 43% to 43.7.
Meanwhile, the corresponding approval rates at big banks (defined as those with $10 billion or more in assets) — while still far below those of credit unions — have been creeping steadily upwards over the past twelve months: from 19.1% in February 2014 to 21.5% in February 2015.
In addition, approval rates at institutional lenders have also increased over the past twelve months (from 56.6% to 60.7%), while comparative rates at small banks (51.4% to 49.6%) and alternative lenders (63.9% to 61.4%) have concurrently dipped.
For both big banks and institutional lenders, the approval rates have now reached post-recession highs, the report said.
"Big banks are starting to grant more conventional loans," Arora said in a statement. "This allows them to keep fixed-loan expenses down compared to SBA-backed loans, which are not primarily being done at smaller banks. The investment in digitization at big banks has helped expedite the small business loan approval process."
Institutional lenders are also getting their feet wet in this business.
"Institutional lenders are willing to offer more loans that are financially appealing to small business owners," Arora said. "The high approval rate in this category of lenders is a reflection of their strong investment in technology advancements, which enables them to quickly assess the risk of default."
Arora characterized institutional lenders' loan approval process as "incredibly efficient," citing that only a minuscule (0.77%) of loans "made by institutional lenders on our platform have defaulted."
Approval rates at small banks have remained stagnant since reaching an all-time Index high in May 2014. "Smaller banks are better at offering SBA loans, but those loans take time to process," Arora said. "Creditworthy customers who seek quick funding are turning to other types of funding that take less time to process. This leaves smaller banks with less attractive borrowers than they had a year ago and explains why approval percentages are dropping."
Biz2Credit also noted that the emergence of institutional lenders in the small business arena has had a "converse impact" on alternative lenders (i.e., merchant cash advance companies, and other non-bank institutions) which have shown a gradual decline in loan approval rates for more than a year now.
"Alternative lenders have been impacted most by the emergence of institutional players," Arora explained. "As the economy continues to improve, small businesses with good credit standing don't have to borrow money at high interest rates often associated with alternative lenders. Small business owners were often obligated to pay high interest rates during the 'credit crunch' when they were desperate for money. However, this is no longer the case."
But credit unions, Arora asserts, continue to struggle to increase their presence in the small business finance marketplace, losing some share to big banks and institutional lenders.
In an interview with Credit Union Journal, Arora said credit unions will have difficulty maintaining its hold in this space largely due to the 12.5% ceiling on the amount of assets a credit union can have parked in member business loans. Some of the larger credit unions, he noted, are already near that 12.5% limit on their books. (The credit union movement would like to lift that ceiling to 27.5%).
Meanwhile, he also said he expects big banks and institutional lenders to more aggressively offer small business loans as the overall U.S. economy continues to improve.
Last month, the U.S. Small Business Administration (SBA) entered into pacts with NCUA and NAFCU aimed at helping small businesses connect with local credit unions to get better access to capital.
It remains to be seen if such endeavors will help credit unions make bigger forays into business lending.
Dennis Dollar, an Alabama-based credit union consultant, noted that approval rates for business loans do not fluctuate much for credit unions since underwriting standards do not normally change dramatically year to year.
"The volume of applications is the best way to determine if the market percentage is going up or down, not necessarily the approval rate," he explained.
He also noted that he does not think the credit union industry is "struggling" in the small business lending marketplace based upon the approval percentage of applications without addressing the volume of applications.
"The increase in credit union small business lending is well established, validated by [the fact that] the banking lobby is working so hard to keep credit unions from having to authority to do more small business lending," he declared. "Credit unions are definitely becoming more significant players in their communities as it relates to the small business lending arena, with their volume going up even as their underwriting stays solid and the approval rates are about the same year to year."