Business borrowers are turning to non-bank lenders, according to the Biz2Credit Lending Index released in April.
Biz2Credit CEO Rohit Arora said that the changing trend in business borrowing habits is caused by two main conditions:
“Complicating the financial woes of small firms is the ever-rising cost of capital as the Fed raised its base lending rate another 25 bps up to a range of to 5% to 5.25%,” Arora said. “While the central bank is signaling that this may be the last increase this year, right now, interest rates are at their highest levels since 2007.
“Companies that need working capital to pay their bills are paying a higher cost of capital for it,” he added. “This combination puts stress even on small businesses that are thriving. It’s a Catch-22 situation right now.”
“The instability in the banking system goes well beyond the recent collapses of Silicon Valley Bank (SVB) and Signature Bank,” Arora said.
He also referenced First Republic Bank, calling it “a bank that was run much more responsibly than Silicon Valley Bank.” Arora noted that First Republic Bank was taken over by the FDIC, and its assets were sold to JPMorgan Chase.
Arora said that other midsize and regional banks may also be in trouble as business accounts continue to withdraw their money.
“While we do not have a full bank run yet, these developments hurt the banks’ ability to lend to small businesses,” Arora added. “The FDIC insures deposits up to $250,000, which is a relatively small amount for commercial accounts and leaves some deposits uninsured.”
“The vast amount of uninsured deposits in the banking system raises the likelihood of bank runs in the future,” he said “This is bad not only for small businesses, but for the economy as a whole.”
The Biz2Credit Lending Index, By the Numbers
Lending rates decreased at Big Banks, Small Banks and Credit Unions.
Big Bank loan approval rates slipped to 13.5%,, down from 15.1% a year ago.
Small Bank loan approval rates dropped to 18.7%, down from 20.8% a year ago.
Credit Union loan approval rates were 19.8%, down from 20.6 a year ago.
Lending rates increased at Institutional Lenders and Alternative Lenders.
Institutional Lenders were at a 26.7 approval rate, an increase from 25.4% a year ago.
Alternative Lenders were at 28.7% approval rate, up from 26.8 a year ago.