Bank lending to small businesses reached post-recession record highs in February, according to the latest Biz2Credit Small Business Lending Index.
Big banks, classified as institutions with assets greater than $10 billion, approved 19.1% of small business loans during February, up 13 basis points from January. Lending approval rates at big banks have jumped more than 20% year over year, the index revealed.
Meanwhile, small banks approved 51.4% of small-business loans in February, up from 50.9% the prior month.
The New York-based firm's index analyzes 1,000 loan application requests ranging from $25,000 to $3 million from companies in business more than two years with an average credit score above 680.
"Confidence in the economy and winter-stressed financials [has] encouraged businesses to be more bullish on applying for funds to invest in their companies," said Rohit Arora, Biz2Credit's chief executive, in a news release.
As bank lending has ramped up, credit union approvals have continued to decline. February approvals fell by a basis point from a month earlier, to 43.3%, marking the lowest rate since the Biz2Credit Index started at the beginning of 2011.
Additionally, credit unions' approval rates have fallen in 17 of the last 21 months and are down approximately 25% during this time period.
Alternative lenders, which had been the biggest beneficiaries of the government shutdown last October, are starting to see their approval rates slip because of competition in the marketplace from institutional lenders who charge lower interest rates. Their approvals in February fell to 63.9% from 64.1% the month before.
Conversely, institutional lenders saw their approval ratings rise to 56.6% of the funding requests they received in February, which is one basis point higher than the prior month when Biz2Credit started measuring this specific index. This category of lenders includes credit funds, insurance companies, family funds, and other nonbank financial institution.
Since pricing pressure on alternative lending is increasing, fewer businesses are inclined to take high-cost cash advances, Arora stated in the report. For example, institutional investors pursuing small-business lending deals can offer interest rates of 6% to 8%, similar to banks, while alternative lenders can charge 20% to 50%.
"Some business owners don't realize how high the interest rates are from alternative lenders when they first secure the funding," Arora added. "If and when they can, small-business owners pursue traditional bank loans at lower rates. This leaves the alternative lenders with poorer quality loan applicants, which is why their approval rates have declined."