Commercial small business lending declining, prompting alternative methods to grow

Small businesses have seen loan availability fluctuate in recent years, and a recent report by Reuters found January to be on the negative side.

"It's a play-it-safe kind of economy for small businesses," PayNet founder Bill Phelan said in an interview. "They are not getting pulled in by the cheap credit and extra money floating around. They are continuing to hold back in investment growth."

The Thomas Reuters/PayNet Small Business Lending Index dipped from 115.8 in December to 113.1 in January. The index measures loan totals, along with the availability of funds, for the small business sector.

On the positive side, year-over-year borrowing grew 13 percent and is expected to tick up another 2 percent in 2013. In addition, late payments, delinquency rates and financial stress for small businesses are on the downward slope.

What, then, has prevented small business growth from taking off? Most likely, it's been the lack of availability of commercial loans.

A recent Politico column by the CEOs of International Franchise Association, the National Small Business Association and the National Association of Development Companies suggested that tighter lending restrictions have stunted growth in the industry.

Alternative lenders plugging in gap
Small businesses are an essential component of the United States' economic success, according to the Politico piece, accounting for approximately two-thirds of new jobs.

Although lending policies by banks and credit unions have tightened in recent years, the sector has remained relatively sturdy - most likely because of the help of alternative short term lenders.

According to a recent study by Biz2Credit, alternative lenders still approve the highest percentage of small business loan requests.

"With traditional banks easing credit, the fallout effect is that alternative lenders are getting more requests from lesser qualified borrowers," said Biz2Credit's Rohit Arora. "They were early adopters of technology and had the advantage of quick response in granting loan requests."

Neither credit unions nor small banks approved more than half of small business loans in January, while big banks pushed through just 15.3 percent of requests.

By comparison, alternative short term lenders accepted nearly 64 percent of requests. Throughout 2012, these firms approved at least 62 percent of loans, including a high-water mark of 64.7 percent in October.

Because alternative lenders often use alternative scoring methods, like the Payment Reporting Builds Credit, which analyze data like utility bills instead of just traditional lines of credit, they have made funds available to previously unqualified candidates. With small businesses struggling to secure loans since the recession, this has been an enormous benefit.