The rate of small business loan approvals have remained largely stagnant — and at historically low rates — over the past year at credit unions, while such rates have been gradually edging upwards at the big banks, according to the Biz2Credit Small Business Lending Index, a monthly analysis by Biz2Credit.
A survey by Biz2Credit of more than 1,000 small business loan applications — ranging in value from $25,000 to $3 million — made by companies with an average credit score above 680 across the nation in April 2015 revealed that credit unions approved 43% of them (a figure that has dropped during five of the last six months).
Conversely, lending approval rates at the big banks (defined as having in excess of $10 billion in assets) and institutional lenders continue to move upwards.
Specifically, according to Biz2Credit data, 21.7% of small business loan applications made to big banks were approved last month — up from 19.4% in April 2014.
The highest rates of loan approvals occurred at alternative lenders (61.1% in April) and institutional lenders (also 61.1%). For small banks, the corresponding figure came in at 49.6%.
But approval rates have remained largely unchanged at most classes of financial institutions over the past twelve months, the data show. For credit unions, the monthly loan approval rates have generally ranged between 43% and 44% over the past year — although as recently as early 2012, the approval rate was as high as 57%.
Rohit Arora, CEO of Biz2Credit, sees this as a problem for credit unions, citing that the flat loan approval rates suggest something amiss.
"Credit unions have been slow to adapt to technological changes that automate the small business loan application process," Arora told Credit Union Journal. "They have also been long handcuffed by the member business lending cap of 12.25% of total assets."
Arora lamented that many credit unions still operate in a "very old fashioned way."
"You have to come in off the street, fill out an application and become a member before you can apply for a small business loan," he said. "Entrepreneurs are time-stretched. Why make a special visit and fill out paperwork when you can accomplish the same goal by doing an automated small business loan application at your office or at home during off hours?"
But some senior credit union executives see nothing wrong with existing loan approval rates at credit unions.
Larry Middleman, the president and CEO of CU Business Group, a Portland-Oregon-based CUSO focused on business services, said the 43% loan approval rate figures at credit unions reflect both a healthy business climate as well as a refusal by credit unions to relax their strict underwriting standards.
"If the overall business volume is increasing under an improving economic backdrop, and the loan approval rate remains the same, it means that your business volume is actually expanding," Middleman told Credit Union Journal.
Indeed, citing NCUA data, Middleman noted that from 2000 to 2014 — a period that witnessed a historic recession and a near-collapse of the global economy — the volume of member business loans by U.S. credit unions skyrocketed from just under $5 billion to almost $45 billion.
"As an industry, credit unions did not miss a beat, even during the recession," Middleman said. "They were able to deliver impressive member business loan growth without having to compromise their tough lending standards."
In addition, between 2008 and 2014, commercial loans, including loan participations, issued by credit unions jumped from $32 billion to $50 billion. Such loans issued by community banks actually dropped by 24% over that period, while for all banks, the volume edged up by just 3%.
"Participations are common with credit unions and allow the industry to make more loans than individual credit unions can on their own.This volume doesn't show in the figures, but it is significant," commented Middleman.
Middleman also noted that while alternative and institutional lenders' technology may be better, those types of lenders often charge higher interest rates and have more onerous fees for businesses."Using technology to get a loan is often faster and easier but it usually comes at a significant cost to the business," Middleman stated. "Interest rates on business loans today from credit unions are typically in the 3%-to-5% range, while rates from alternative and institutional lenders are at 6% to 10% or higher."
Keith Troup, executive vice president/chief operating officer at Y-12Federal Credit Union, a $780-million institution based in Oak Ridge, Tenn.,said most credit unions have adhered to conservative lending rules that have served most credit unions well.
"I have observed that increasing numbers of credit unions are now getting into commercial real estate loans — which, since they are backed by real property, are extremely secure loans for the most part," he said. "Having had successes with these loans, some credit unions have now diversified into the area of unsecured loans, which tend to be riskier in nature. I see the level of risk [that] credit unions are willing to take on when originating Small Business Loans slowly evolving over time."
Arora said he agrees that maintaining strict lending standards is important for financial institutions, but the stagnant rate of approvals may have more to do with CUs needing to appeal to stronger borrowers, who may be lured by "name-brand banks" more often than to credit unions.
"No one is suggesting [making any] erratic, risky investments," he said. "However, I believe that many times, rejections [of requested loans] stem from the quality of the borrowers. As the economy improved and people became less worried about borrowing money and investing in their companies, they have tended to go with name-brand banks. The institutions that invested in branding are reaping the benefits now. Thus, big banks are attracting high-quality borrowers. When approval rates are low, that can be an indication that the lender is getting lower quality [risky] borrowers coming to them."
Indeed, with respect to the rising rates of loan approvals at big banks, Arora attributes that partly to a stronger national economy.
"Now that 2014 tax returns have been filed, it is evident that the economy is doing better. I expect that loan approval rates will continue to go up in the foreseeable future," Arora said. "Big banks are more willing to grant bigger loans to business owners that have a track record of proven success."
Of course, on an absolute basis, the loan approval rate at the big banks is about half that of credit unions. Arora explained that prior to the recession, the approval rate at the large banks tallied at about 45% or higher — a figure that we are unlikely to see again.
"During and after recession, institutions became risk- averse," he added. "For big banks the approval rates dipped to single digits. Fortunately, those days are over."
In addition, since the big banks focus on bigger deals — typically looking to make loans of $2 million or more, their credit standards are higher. "They need to do this because small loans are less profitable for them," Arora explained. "Furthermore, banks are also more closely regulated than institutional players."
The high rates of approval by institutional lenders suggest this group is becoming more "mainstream" in the small business market and are "supplanting cash advance companies [alternative lenders] among non-bank sources of capital," Arora stated.
"Since advance companies charge a premium rate, the laws of economics dictate that unless you differentiate the product, eventually a lower price competitor will steal market share," he said. "We have seen this happen to cash advance companies."
Arora also said that there is no doubt that institutional lenders are taking deals away from competitors. "Their lower interest rates and longer terms give them an advantage over cash advance companies," he noted. "Their speed and efficiencies, which come from marketplace lending platforms such as Biz2Credit's, give them an edge."
But Pam Easley, CEO and President of Extensia Financial, a national Member Business Lending CUSO based in Northridge California, said her team has observed the opposite of Biz2Credit's findings.
"We are seeing an increase in both small business lending applications and loan approval rates by credit unions over the past year," she told Credit Union Journal.
"Credit unions are dedicated to assisting their membership and in supporting a stronger business lending strategy."