How Amazon Is Impacting Small Business Finance

As has proven the case throughout 2017 and the early part of 2018, small business loan approval rates for big banks hit another new high last month, according to the Biz2Credit Small Business Lending Index™ (February 2018 figures). Big banks, defined as institutions with assets of more than $10 billion, are granting more than one-quarter of the small business loan applications they receive. The 25.4% approval percentage, up one-tenth of a percent from January 2018, represents another new post-recession benchmark for big banks.

We have come a long way from the doldrums of the credit crunch in 2010-11. During the second half of 2011, for example, loan approval rates never went past 10 percent. Thus, more than nine-of-ten small business funding requests were rejected by big banks. In fact, banks were denying the requests of long-time customers with whom they had deposit relationships.

As this happened, small business borrowers looked for other funding options. Some found willing lenders in small banks, others in credit unions. Entrepreneurs also looked to non-bank “alternative” lenders and quickly learned that they could search for the best deals on small business funding online, just as they had embraced Amazon and other sites for online shopping.

Gradually, the economy improved, and we saw big banks and other funders steadily increase the number of funding requests they granted to small business owners. Approval percentages reached double digits since January 2012 and have not dropped below 10 percent since. Less than a year ago, big banks crossed the 20 percent benchmark, and now more than one-quarter of applicants receive funding.

The solid economy of the past year is a big reason for this good news. Consumer confidence is high, as is small business owner optimism. At the same time, fuel prices are still low, and more jobs than expected were created by the economy in February, according to the most recent Jobs Report issued by the Labor Department. Meanwhile, the Federal Reserve has begun to raise interest rates from the near-zero levels of a few years back. This makes lending more profitable for banks.

Another reason that lending figures have climbed is because of the revolution of online retail that is led by Amazon. There is a lot of demand to fund commercial real estate. While mall construction has essentially halted, ecommerce has caused a boom in the construction of warehouses and other industrial buildings. Additionally, companies involved in transportation and logistics are servicing Amazon and other online retailers.

Many of the loans processed by small banks are SBA loans, which lowered the down payment requirements for commercial real estate from 20 percent to 10 percent. That has spurred SBA lending, one of the nation’s leading experts in small business finance. Another factor is that SBA loan defaults are less than one percent. Meanwhile, the SBA’s 75 percent guarantee is still in place.