Approval rates for small-business loans dropped at big banks for the first time in seven months, as nonbanks continue to grant loans at a much more generous pace.

Banks with more than $10 billion in assets approved 20.4% of small business loans in October, according to a study by Biz2Credit, a New York online loan marketplace. That was down slightly from 20.6% in September.

Meanwhile, institutional investors granted 59.7% of applications in October, up from 59.5% the previous month. Alternative lenders approved 62.1% in October, down from 62.6% in September.

The changes in all three cases were small, but those figures and others in the study reaffirmed the heated competition among lenders of all stripes.

Since institutional investors and alternative lenders are now offering long-term credit at a cheaper price, more "high-quality borrowers" have been seeking loans from them rather than from big banks, Biz2Credit Chief Executive Rohit Arora said in an interview.

"Businesses who typically would have gone to a bigger bank to borrow $500,000 to $1 million, who weren't willing to pay a yearly interest rate of 30%, are now going to alternative lenders with bigger loan requests for lower rates and faster underwriting," Arora said. "These clients are seeing that they can get money from another source without paying a high cost."

Still, big banks' approval rates on small-business loans have risen nearly 20% compared with last November, Biz2Credit said. Approvals remain below precession levels, when big banks were granting about 36% of small business' loan applications, Arora said.

"As the economy improves, we'll see greater demand for small-business loans coming back," Arora said. "If big banks can get their technology in place and comply with industry regulations, then they will be able to come back. Otherwise, institutional players will continue to become bigger and bigger in this space."

The study also showed that banks with less than $10 billion in total assets are approving nearly half of their small business' loan requests. However, approval rates for these institutions have been stagnant since the beginning of this year as small banks are having trouble attracting new customers.

"If small banks don't invest in technology and customer experience, things will get tough for them," Arora said. Their traditional, pro-customer appeal is "getting eroded by the institutional guys, and the big banks are obviously making more effort to retain and attract more high-quality customers."

The Biz2Credit study analyzed 1,000 loan requests of $25,000 to $3 million from businesses opened at least two years that have an average credit score above 680.

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