Small business lending market shows signs of life ahead of 2014
Dec 16, 2013 Sean Albert
Although entrepreneurs had to brave some of the most turbulent economic conditions the United States has ever seen during the Great Recession, the resilient small business sector is beginning to show significant signs of recovery. One of the most accurate indications of startup health and optimism is the amount of commercial loan disbursements that come from traditional and alternative financial services providers.
Throughout 2013 and spanning back to middle 2012, small business lending approval ratings at larger financial institutions, smaller banks, credit unions and alternative lenders all increased. This translated to much better access to credit than had been seen since before the recession, as well as more optimistic conditions given the importance of financing.
Growth in October?
Despite what certain initial reports seemed to indicate, and against the fears of many U.S. economists following the government's decision to shut down, it appears as though entrepreneurs borrowed more in October than any other month in the past 6 years. Reuters recently reported that its latest Thomson Reuters/PayNet Small Business Lending Index hit 120.4 points in October, or roughly 11.5 points higher than September's reading.
Researchers involved in the monthly study noted that the index is best understood in the context of the next several months, the source explained. According to the news provider, increases in the index generally translate to more positive economic conditions, specifically regarding employment and gross domestic product one to two financial quarters in the future.
Reuters and PayNet also found that that economic output on a national scale is much stronger than it was when the index hit its now second-highest level in the beginning of 2007. As such, the news provider asserted that it likely indicates substantial room for and a promise of growth in the coming months.
One of the more shocking aspects of this reading is that the government was effectively shut down for half of October, suspending all types of small business financing programs. However, small business lenders were exceptionally active in the first two weeks of the month.
Other signs of recovery also showed in the report. According to Reuters, separate PayNet data revealed that delinquencies on small business loans continue to fall, and remain well below levels seen during and immediately following the recession. PayNet's President Bill Phelan told Reuters that these findings bode well for GDP.
Alternative lending activity
Although traditional banks have started to increase small business loan disbursements in greater numbers, alternative lenders have carved out a significant portion of the market. With approval rates that are as much as triple those of certain traditional lenders, alternative financial services providers have largely pulled the small business sector out of one of its darkest periods.
Using advanced technology and novel techniques, these financing firms have diversified their options substantially, leading to more unique and customizable products for small businesses to acquire.
Alternative lending options will not always be the best-suited to a company's specific needs, but small business owners should never hesitate to research all of the financing options available to them before signing a contract.