Banks put the brakes on small-business lending in October as the government shutdown shuttered the Small Business Administration and the Internal Revenue Service.
Banks with more than $10 billion of assets approved just 14.3% of small business loans in October, down from 17.5% the previous month, according to a monthly survey released Tuesday by online loan intermediary Biz2Credit. Small banks approved 44.3% of applications, a decline from 50.1% in September and the lowest portion recorded since August 2011.
The slump in lending is a direct result of the government shutdown, according to Biz2Credit chief executive Rohit Arora.
"SBA loan approvals stalled because the agency was not working for three weeks," Arora said in a Tuesday press release. "Similarly, non-SBA [loans] could not be processed during the government shutdown because the IRS was shut down." With the IRS closed, banks could not obtain the income verification necessary to approve many loan requests.
The effects of the shutdown may further hobble small-business lending in the weeks ahead, Arora said. "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," he said in the release.
While banks slowed small-business lending in October, alternative lenders swooped in to take their place. Alternative lenders approved 67.3% of loan applications, an all-time high since the survey began in 2007. They approved 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," Arora said. "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."
Biz2Credit's monthly survey analyzes 1,000 loan applications from small-business owners.