NEW YORK — The government shutdown crimped small business lending by credit unions, with a 4% decrease in approval rates in October, according to a new study.
The latest Biz2Credit Small Business Lending Index, a monthly analysis of 1,000 loan applications on Biz2Credit.com, released Tuesday, said credit union small business lending had been on the rebound prior to the government shutdown.
But lending approval rates at credit unions fell to an all-time low of 43.4% in October, down from 45.4% the previous month.
Small business loan approvals at big banks (over $10 billion in assets) dropped to 14.3% in October, a significant drop from the loan approval rate of 17.5% recorded in September, Biz2Credit said. Approval rates at small banks dropped from 50.1% in September to 44.3%, which marks the lowest figure since August 2011.
"SBA loan approvals stalled because the agency was not working for three weeks. Similarly, non-SBA could not be processed during the government shutdown because the IRS was shut down," said Biz2Credit CEO Rohit Arora, who oversaw the research.
"Banks could not acquire income verification from the IRS during the shutdown, which is needed to approve many loan requests," continued Arora. "A major backlog of SBA loans from the shutdown will take months to process, and the debt ceiling debate could negatively impact small business lending even further in the coming months."
Alternative Lenders Gain Share
Meanwhile, Biz2Credit noted, alternative lenders seized the opportunity and picked up the slack in small business lending. Approval rates by alternative lenders increased to an index high 67.3% in October 2013, up from 63.2% the previous month.
"Small business owners were desperate for capital during the shutdown and turned to alternative lenders, who were willing and able to provide money, but at a much higher interest rate than a bank or credit union would charge," said Arora. "The stop in the flow of capital came at a time of year when small businesses traditionally search for funding. The economy, which is still in the weak recovery phase, simply cannot sustain this kind of disruption."
Arora predicted funding approval rates will climb in November as the financial services industry recovers from the impact of the government shutdown.
