Although approval percentages at banks and non-bank lenders (institutional lenders, alternative lenders and others) have increased steadily over the past 12 months, the rebound in small business lending has been far from robust.
Small business loan approval percentages at large banks ($ 10 + assets) fell from 14.2% in November to 14.3% in December, and small bank approvals also fell from 19.9 % last month to 20.1% in December, according to the latest Biz2Credit Small Business Loan Index.
Approval percentages have also increased among non-bank lenders. Institutional lenders approved 24.9% of financing requests in December, up a tenth of a percent from 24.8% in November. Alternative lender approval rates fell from 25.8% in November to 26.1% in December. Credit unions approved 20.6% in December, the same percentage as the previous two months.
Two years ago, bank approval percentages were about double what they are today. Large banks approved 28.2% of loan applications, while small banks approved more than half (50.6%) of loan applications received in December 2019. The percentages of non-bank lenders in 2019 were still higher: Institutional lenders approved nearly two-thirds (66.2%) of applications, alternative lenders granted 56.3%, and credit unions approved 39.7%.
Following the economic shock of the pandemic, approval percentages are increasing more slowly than expected. Loan approval rates remain well below pre-COVID approval levels of just two years ago.
The total number of non-farm jobs increased by 199,000 in December and the unemployment rate fell to 3.9%, according to the employment report released by the United States Bureau of Labor Statistics on Friday, January 7. 2022. Employment continued to grow in leisure and hospitality. , in professional and commercial services, in manufacturing, in construction and in transportation and warehousing, according to the report. Many of these jobs are created by small businesses.
After the PPP, banking activity in small business loans has been slow. In 2022, however, with the end of government lending programs and the expected rise in interest rates, it will become more lucrative for banks to lend again, and hopefully they will. Small business lending is expected to pick up this year with the introduction of higher rates.
During his confirmation hearing for his second term in Congress on Tuesday, January 11, Federal Reserve Chairman Jerome Powell said he believed inflation was mainly due to supply chain issues and indicated that the central bank would focus its attention on reducing inflation. Raising interest rates is one tool in the Fed’s arsenal.
“On the eve of the pandemic, the US economy was experiencing its 11th year of expansion, the longest on record. Unemployment was at its lowest for 50 years and the economic benefits were reaching the most marginalized. No obvious financial economic imbalance threatens the ongoing expansion, but that alluring image changed virtually overnight as the virus spread across the globe. The initial contraction was the fastest and deepest on record. But the pain could have been much worse.
When the pandemic arrived, our immediate challenge was to avert a full-scale depression, which would require swift and strong political action from across government. Congress provided by far the fastest and broadest response to any postwar economic downturn. At the Fed, we use the full range of political tools at our disposal. We acted quickly to restore vital credit flows to households, communities and businesses and to stabilize the financial system. – Federal Reserve Chairman Jerome Powell during his confirmation hearing on Tuesday, January 11, 2022
Powell said these collective political actions, along with vaccine development and availability and American resilience, have helped cushion the economic blow and spark a historically strong recovery. The Fed chairman said the economy is growing at its fastest pace in many years and the job market is strong again.
However, challenges remain. The individual shutdown and subsequent reopening of the economy was unprecedented. As the economy has recovered despite the ongoing pandemic, supply and demand issues are driving inflation.
“We are firmly committed to achieving our statutory goals of maximum employment and price stability,” said Powell. “We will use our tools to support the economy and a strong labor market and to prevent higher inflation from taking hold.”
Financial markets don’t like uncertainty. Unfortunately, with COVID-19 and its variants still taking unpredictable turns, uncertainty persists at this time. Normalcy has not returned because the virus has not allowed it. Vaccination was expected to reduce the problem, but it did not happen as most people hoped. The small business economy was not expected to stagnate for this long, and inflation was certainly not expected to reach the levels seen today.
We could not expect the era of extremely low interest rates to continue indefinitely. Rising interest rates will drive up the cost of capital, but it will also cause banks to loosen the purse strings of small business owners who want to invest in their business. After all, what is the point of having low interest rates when institutions have not been very willing to lend at the indicated rates?
Some companies are doing well, despite the pandemic: IT, financial services, and anything that doesn’t require a lot of human interfacing. Other industries, including hotels, entertainment venues, restaurants and cruise lines, are still struggling to overcome labor shortages and the negative impacts of Covid-19 on the economy. Until the coronavirus is brought under control, it will take some time for these industries to fully rebound.