12.29.17
3 Small Business Lending Trends for 2018
Karl R. LaPan, President & CEO, The NIIC
There is no doubt the economy is strong and growing. Banks were not shy in lending to small business in 2017. From all accounts, it looks like that trend will continue. According to PayNet, there is a $50 Billion+ credit gap in the U.S. today. In Indiana alone, there is a $2 Billion in lost GDP in the credit gap with nearly 21% of requests unfulfilled and over 50% of small firm credit applications completely denied. I will be posting an infographic on this challenge to share insights into the problems.
Here’s what some of the experts are forecasting for 2018 in terms of small business lending:
1) Interest rates will continue to climb slowly (so long as the forecasted GDP growth is achieved).
The Fed increased its target federal funds rate three times in 2017. While the hikes were not steep, they do foster a pro-lending environment. And when borrowers believe they have a good chance of securing loans, they are more likely to apply.
In recent months, applicants have been met with positive responses. It’s estimated that big banks ($10 Billion+ in assets) approved one-quarter of the small business loan requests they received in November 2017. Smaller community and regional banks are granting almost half of their applications — a major shift from the post-recession credit crunch.
If interest rates continue their ascent and the economy keeps pace, we can expect optimism among both borrowers and lenders to remain, and therefore spur lending activity.
2) Banks and FinTech companies will further establish partnerships.
Millennials have buying power—they represent a significant share of the market. And if you’ve spent any considerable time with a Gen Y’er, you know they are (generally speaking) glued to their phones. Gone are the days when the majority of financial transactions are performed at a bank branch; however, studies still show that relationships matter. So, there is still a role for traditional bricks and mortar.
Many Millennial consumers (and business owners) are leaning on FinTech companies that enable them to do more and more in the digital sphere. Want to apply for a small business loan from the convenience of home? FinTech disrupters make that possible. Financial institutions that don’t cater to this demographic shift by adapting their product portfolio to the changing times will surely lose this customer segment.
3) Online lending innovations need to be encouraged + traditional lending sources need to determine how to efficiently underwrite the risks and reduce their transactional costs (costs of loan review).
Alternative lenders like Lending Club made advancements post-recession by lending to small businesses not attractive to traditional banks. Plus, they were early adopters of technology to efficiently underwrite and service the loans. As banks and other lenders catch up in terms of technology and provide funding at attractive rates, these traditional lenders can assist in closing the credit chasm constraining the growth of small businesses.
In need of capital to take your business to the next level? Our longstanding partnerships with banks, credit unions, institutional, and angel investors make the continuum of capital easily accessible for high-performance companies working with The Northeast Indiana Innovation Center (The NIIC).
For high-performance companies thinking about U.S. Small Business Administration (SBA)-backed loans, private placement memorandums or dabbling into crowdfunding, The NIIC can serve as a trusted advisor to help you navigate these choppy waters.
