Lending trends for businessesDate posted: 4/3/15 03:15:00 AM
With an eye on examining bank lending practices, The Federal Reserve's October 2014 Senior Loan Officer Opinion Survey revealed a few interesting trends that are currently making waves in the banking world.
The survey found more than one-fourth of all respondents had higher demand for commercial and industrial loans from large- and middle-market firms, while 13 percent said loan demand increased for firms of all sizes.
The survey, which polled 76 domestic banks and 22 national branches and agencies of foreign banks, revealed 44 percent of respondents had lowered the interest rates for commercial and industrial loans to firms of all sizes in the last three months. Nearly 20 percent of respondents said they also eased the cost of credit lines for commercial and industrial loans, while 12.5 percent said they are charging lower premiums for riskier loans.
While it still can be difficult for many small businesses to secure a loan, this data shows that banks are slowly easing standards and it shouldn't be quite as arduous for business owners and entrepreneurs to secure funding in the near future.
Loan demand is likely to increase
Ted Zoller, director of the Center for Entrepreneurial Studies at the Kenan-Flagler Business School at the University of North Carolina, told The Wall Street Journal banks and financial institutions are likely to see demand soar for business loans as the economy continues to climb out from under the recession.
Applications for small business loans are up in nearly every facet, according to Zoller, but there are still some tough hurdles to climb before small business lending reaches its previous heights.
"The paradox is that banks are not in the position to fill that need to the extent they have been in the past," Zoller said. "Regrettably, most of the capital available for debt is with large institutional banks that were significantly impacted by the financial crisis and now face substantial regulatory hurdles in determining creditworthiness for loans."
Zoller thinks it could take several years before large banks will start offering loans to growing small businesses. The problem is that a huge portion of the nation's credit capacity is settled among a handful of large banks.
Yet it's not the end of the world for small businesses looking for a loan. Zoller said small businesses are finding some success acquiring loans from smaller, regional banks that are familiar with the local economic landscape. He also said they must be willing to take on the risks associated with lending to a smaller business.
Small businesses looking to fund certain things
Tami Ruderer, a business banking executive vice president for a financial institution in Texas, told The Dallas Morning News she's noticed a growing number of small businesses want funding in order to expand.
"In 2014, in particular, we're seeing activity around acquisitions, expanding capital equipment, increasing facility size, and we didn't see that in the early stages out of the recession," said Ruderer, who added there has been substantial demand for business loans in major markets such as Dallas and Houston.
With growing cries for loans from small businesses, credit unions and alternative lenders have also tried to get into the market. Those types of lenders see a hole left by the bigger banks and are looking to take advantage of the current trends.
Rohit Arora, chief executive of Biz2Credit, an online marketplace for small business funding, said loan approval rates were up in 2014 compared to a year ago.
"What happened over one and a half years is the health of businesses has improved," Arora told the Morning News. "So typically … if big banks are going to approve a loan, you need the last three years of financials. From 2011 to 2014, numbers look better now. The recession years dropped off."
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