Why are Banks issuing Fewer Business Loans?
Commercial and industrial loans have been declining throughout the year. The decline rate is small and consistent with other loan types. However, some small business owners may be concerned about the larger economic impact and lending options.
Recession Fears
The impact of a potential economic recession has significantly influenced the decrease in business loans issued by banks. Reduced economic growth and declines in loan volume further contribute to the reluctance of both banks and businesses to engage in extensive borrowing activities.
Two years ago, the Wall Street Journal‘s survey of economists suggested the likelihood of recession was 16%. However, the most recent survey showed a recession probability of 48%. While that is down somewhat from the 63% probability one year ago, the increased recession probability has led to banks tightening lending standards and reducing loan availability.
Fewer Bank Deposits
Bank deposits have also declined by roughly $313 billion since February 2023, almost 2%. The decline in bank deposits can significantly impact the availability of business loans. With fewer deposits, banks have less capital to lend out to businesses. This can result in stricter lending criteria, fewer loans, higher interest rates, and reduced access to credit for small and medium-sized enterprises.
Banks are feeling the pinch from the drop in deposits. Core deposits, which are the total deposits minus large certificates of deposit, have gone down by $1.1 trillion, or 6%, since February 2023. But it’s even worse than that. Both checking account balances and money market deposit accounts have also fallen. To make up for the shortage, banks have turned to using large and brokered small CDs.
How much have Business Loans from Banks declined?
Commercial loan volume has seen a notable decrease, declining by $33 billion since February 2023. While that sounds significant, it’s only about a 1% decline. However, if the trend continues, it will be more of a concern.
Decreased loan demand from businesses reflects declining investments and is attributed to the recession and concerns about economic growth. In September, there was a 2% decrease in business loans from banks, marking the sixth consecutive month of declines, according to the Fed’s latest batch of H8 data.
Are banks tightening Credit Criteria for Business Loans?
Banks are indeed tightening credit standards for business loans. Recession fears have led banks to be more cautious in lending to businesses. Consequently, there’s been a decrease in the volume of business loans and credit contracts being approved by traditional financial institutions like banks.
This change leads to decreased loan demand from businesses due to economic uncertainty. The potential of a recession has made banks more cautious in lending to companies.
Is there less demand for Business Loans?
Business loan demand has decreased notably due to economic struggles and increased interest rates. As the economy experiences a downturn, businesses are more cautious about taking on additional debt in the form of business loans. The uncertainty and financial strain caused by the economic struggles have led many companies to scale back their borrowing activities.
Tightened Lending Standards
As mentioned, banks have been tightening lending standards, contributing to a reduction in business loan volume. This means that businesses face greater challenges when applying for loans from traditional banking institutions. With stricter criteria and requirements, fewer businesses meet the qualifications for obtaining bank loans.
Impact of Higher Interest Rates
The decline in loan demand reflects the influence of higher interest rates. When faced with higher interest payments, businesses may find it less appealing to borrow money.
How does Alternative Business Lending work?
With banks more hesitant to lend, in a cycle similar to the Great Recession of 2008, alternative lenders are stepping up to help business owners get the funds they need to grow. Here’s what you should know about alternative business loans.
Flexibility in Lending: Alternative business lending operates outside the realm of traditional bank loans, providing businesses with funding options that are more adaptable to their needs. These lenders offer more flexible lending standards, enabling a wider range of businesses to qualify for loans.
Quick Access to Funds: Unlike banks, alternative lending institutions provide quicker access to funds, which can be crucial for companies needing immediate financial support. This swift process allows businesses to address urgent financial requirements without enduring lengthy approval periods.
Competitive Interest Rates: Companies can borrow from alternative lenders at competitive interest rates based on their credit and business accounts. This offers businesses an opportunity to secure necessary funds without being burdened by exorbitant interest charges.
Alternative Business Loans Pros & Cons
Pros:
- Quick access to funds.
- Flexible repayment options.
- Can be used for various business needs.
- Less stringent eligibility criteria compared to traditional bank loans.
Cons:
- Higher interest rates.
- Potential for hidden fees.
- Shorter repayment terms.
- May require a personal guarantee or collateral.
Why is United Capital Source unaffected by the decrease in bank lending?
Here at UCS, our lender network has flexible lending standards, making it easier for businesses to qualify for loans. Unlike traditional banks with strict credit standards, our private and non-bank lenders consider a wider range of factors when assessing loan applications.
In addition, our team of loan executives is adept at navigating business loan options and finding creative solutions when the banks say no.
Resilience During Economic Downturns
Even during economic downturns or recessions, United Capital Source continues to offer business loans. While banks may reduce their loan volume due to economic uncertainty, we remain committed to meeting the borrowing needs of companies.
Focus on Meeting Borrowing Needs
United Capital Source prioritizes meeting the borrowing needs of businesses, regardless of fluctuations in the economy. This focus enables us to maintain a steady flow of business loans, catering specifically to the diverse financial requirements of companies across various industries.
What are my options for Alternative Business Loans?
The following small business loans are available through our lender network.
Bad Credit Business Loans
- Amounts: $1k – $5 million.
- Rates: Factor rates starting at 1-6% p/mo.
- Terms: 3 months – 5 years.
- Speed: 1 – 3 business days.
Bad credit business loans are designed for entrepreneurs with less-than-perfect credit scores. These loans typically have higher interest rates and shorter repayment terms but can provide funding when traditional lenders may not. Options include short-term loans, merchant cash advances, and microloans from alternative lenders.
Business Line of Credit
- Amounts: $1k – $1 million.
- Rates: Factor rates starting at 1% p/mo.
- Terms: Up to 36 months.
- Speed: 1 – 3 business days.
A business line of credit is a flexible financing option that allows businesses to access funds up to a set credit limit. It can be used for various business expenses, such as inventory purchases, payroll, or equipment upgrades. Interest is only paid on the amount borrowed, making it a cost-effective solution for managing cash flow.
Business Term loans
- Amounts: $10k – $5 million.
- Rates: Factor rates starting at 1-4% p/mo.
- Terms: 3 months – 5 years.
- Speed: 1 – 3 business days.
A business term loan is a lump sum of money borrowed from a financial institution for a specific period with a fixed or variable interest rate. The loan is typically used for long-term investments such as purchasing equipment, expanding operations, or acquiring real estate.
Equipment Financing
- Amounts: Up to $5 million per piece of equipment.
- Rates: Starting at 3.5%.
- Terms: 1 – 10 years.
- Speed: 3 – 10 business days.
Equipment financing is a type of business loan used to purchase or lease equipment. It allows businesses to acquire the necessary equipment without a significant upfront cost. The equipment itself serves as collateral for the loan, making it a less risky option for lenders.
Invoice Factoring
- Amounts: $10k – $10 million.
- Rates: Factor rates starting at 1% p/mo.
- Terms: Up to 24 months.
- Speed: 1 – 2 weeks.
Invoice factoring is a financing option where a business sells its accounts receivable to a third-party company at a discount. This provides immediate cash flow for the business, as they receive a percentage of the invoice amount upfront and the remainder when the invoice is paid.
Merchant Cash Advance
- Amounts: $5k – $1 million.
- Rates: Factor rates starting at 1-6% p/mo.
- Terms: 3 – 24 months.
- Speed: 1 – 2 business days.
A merchant cash advance is a financing option for businesses needing quick capital. It involves receiving a lump sum payment in exchange for a percentage of future credit card sales. This alternative to traditional loans can provide fast funding for businesses with fluctuating revenue.
SBA Loans
- Amounts: $50k – $5.5 million.
- Rates: Starting at Prime + 2.75%.
- Terms: 10 – 25 years.
- Speed: 8 – 12 weeks.
SBA loans are government-backed loans designed to help small businesses access financing with low interest and favorable terms. They can be used for various purposes, including equipment purchases, working capital, and real estate. The Small Business Administration (SBA) guarantees a portion of the loan, making it easier for businesses to qualify for funding.
Working Capital Loans
- Amounts: $1k – $5 million.
- Rates: Starting at Prime + 2.75%.
- Terms: 3 months – 10 years.
- Speed: 1 – 3 business days.
Working capital loans are short-term loans used to cover day-to-day operational expenses. They are often used to manage cash flow, purchase inventory, or cover payroll. These loans can help businesses bridge the gap between paying for expenses and receiving revenue. They are a valuable tool for maintaining financial stability and growth.
Frequently Asked Questions
Here are the most common questions about the trend of fewer business loans from banks.
Is it hard to get a Business Loan through a Bank?
Yes, getting bank financing has always been challenging, but it’s becoming increasingly difficult now. Banks have raised their standards for business loans, making it difficult for many small businesses to qualify.
Will Business Bank Loans Continue to decrease?
The overall economic growth slowdown could be contributing to the decrease in loan volume. When the economy is not performing well, banks might hold off on lending money as they anticipate lower returns on investment.
If the economy continues to struggle, loan volume will likely continue to decrease. As the economy improves, more loan options will become available.
Bank lending standards are becoming stricter, making it more challenging for businesses to qualify for loans. This means that banks are more cautious about whom they lend money to and may require higher credit scores or more collateral.
Businesses are showing less interest in taking out loans from banks. As a result, the demand for business loans is declining. Some businesses might be hesitant to borrow due to economic uncertainty or maybe explore alternative financing options.
Fewer Business Loans from Banks – Final Thoughts
The decline in traditional bank loans for businesses is real and happening for various reasons. The landscape is changing from tighter credit criteria to the rise of alternative lending options.
Alternative business lending, like the solutions offered by United Capital Source, provides a viable pathway for entrepreneurs to secure the funding they need. While traditional bank loans may be decreasing, the world of business lending is still full of opportunities if you know where to look.
If you’re a business owner feeling the squeeze from traditional banks, it might be time to explore alternative lending options. Don’t let the decline in bank loans hold your business back. Contact us to explore your small business loan options.
