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Small business lending insights Vol. 1

Abrigo
April 25, 2024
Read Time: 0 min

Recent data and trends of the small business lending market

 SMB Lending Insights is a snapshot of current financial trends and metrics that impact small and medium-sized business (SMB) lending and financial institutions. 

You might also like this guide for smarter, faster small business lending.

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Takeaway 1

 SMBs and financial institutions face tremendous uncertainty in the current environment, which is characterized by elevated interest rates, high inflation, and growing personal delinquency rates. 

Takeaway 2

 SMBs and financial institutions face tremendous uncertainty in the current environment, which is characterized by elevated interest rates, high inflation, and growing personal delinquency rates. 

Takeaway 3

 With lower interest rates nowhere in sight, lenders need to monitor and adjust lending and underwriting strategies based on their own institution’s credit risk profile. 

Introduction

Small business lending by banks & credit unions

 SMB Lending Insights is a snapshot of current financial trends and metrics that impact small and medium-sized business (SMB) lending and financial institutions. 

The report is based on data from Abrigo Small Business Lending Intelligence, a lending decision and monitoring engine powered by Charm Solutions. Abrigo Small Business Lending Intelligence uses observations from Abrigo's client base of over 2,400 U.S. institutions to provide a comprehensive representation of the banking and financial sector. Data in this report is current as of Q2 2023 and is representative of market trends and conditions at the time of publication. The average size of loans examined here was $637,000. 

Executive Summary

 SMBs and financial institutions face tremendous uncertainty in the current environment, which is characterized by elevated interest rates, high inflation, and growing personal delinquency rates. The data below outlines SMB loan origination trends, delinquencies on SMB loans (90+ Days Past Due, or DPD), and changes in the average loan sizes for various industries. Financial institutions can consider this information to benchmark trends at their own institution and to evaluate plans. 

Additionally, the data shows that loans to SMBs, like mortgages, have been highly sensitive to the changes in interest rates. It also shows business loan delinquencies remain low but are approaching pre-COVID levels and are seeing a gradual, though noticeable, upward trend. With lower interest rates nowhere in sight, lenders need to monitor and adjust lending and underwriting strategies based on their own institution’s credit risk profile. At the same time, lenders using relationship-based strategies 

Data: SMB loan volume 

As the Fed has raised rates and pared back the size of its balance sheet, headlines have increasingly pointed to mortgage funding drying up. Our data below shows SMB loan originations have followed a similar trend. As rates go up, business loan originations go down. SMB loan origination volume is down 42% year over year and well below the recent run rate. The negative correlation of funded business loans to the Fed funds rate is a staggering 86% as businesses weigh their needs for capital against expensive debt and lenders aim to limit risk. 

Indeed, most small businesses require external financing to survive and grow. The Fed’s latest Small Business Credit Survey, conducted in 2023 and released in 2024, found that nearly 60% of employer firms had sought financing in the previous 12 months. Almost half sought credit to grow their businesses, and 28% applied to make repairs or replace capital assets. At the same time, 59% pursued credit to meet operating expenses. A majority of applicants sought less than $100,000.

Generally, small business loans benefit business owners, they also benefit communities, according to 2021 research for the SBA. Small business loans “have large and significant effects on employment growth and job creation, particularly for firms with less than 100 employees.” Loans of less than $100,000 showed the strongest impact.

SMB delinquency rates 

The delinquency rates of SMB loans originated since 2019, shown below, illustrate the resilience and adaptability of SMBs. The rate, as measured by the 12-month average of loans 90+ DPD, spikes for loans originated during the COVID-19 pandemic. Starting with loans originated in January 2021, delinquency rates begin to fall and even dip below historical averages. While rates for those cohorts of loans now show a return to the mean, they are still lower than a year ago and pre-COVID. However, the delinquency rates for more recently originated loans are higher than they were a year earlier, while rates for loans funded in the previous 16 months are lower than a year earlier. 

Loan sizes across industries 

The SMB loan landscape over the past year has seen loan sizes contract across nearly all industries, which makes sense in light of higher loan pricing, the outlook, bank tightening, and other factors. 

Also, the average loan size in manufacturing ($802,234) is down 43% year over year. Other industries with double-digit declines in average loan size are hotel and food, retail, transport and warehousing, and construction. Meanwhile, the average loan size in healthcare ($1,274,631) is only down 9% year over year. The disparities across industries highlight the need for tailored strategies by lenders.

Shrinking safety net for SMBs 

Importantly, alternatives to bank loans that SMBs traditionally turn to for capital are under increased pressure. SMB owners often access personal credit as an immediate solution to their business financing needs, either via a credit card or an unsecured 

Delinquency rates among both types of safety nets for businesses have reportedly increased, according to Transunion, with rates for more recently issued credit increasing sooner and faster than ones on the books longer. With a shrinking cushion of consumer savings along with inflationary and interest rate headwinds, we should expect these numbers to get worse. In addition, lenders tightened credit standards for approving applications for these types of credit in the third quarter.

Tighter lending standards on personal credit in the current economic environment could have a two-fold impact on SMB owners. Consumers who have been relying on personal credit products may spend less on SMBs’ goods and services, narrowing owners’ income at the same time their supporting sources of traditional business credit shrink or get more expensive. 

Implications 

SMBs and financial institutions can both take several actions to improve their positions in this environment. It is essential for banks and credit unions to adjust lending and underwriting strategies to secure profitable new or expanded business loans with acceptable risk. Using the latest platforms, machine learning/artificial capabilities, and data will enable them to do so efficiently. Banks and credit unions that do not evolve their lending capabilities face higher operating expenses and are at higher risk of suffering increasing loss rates. Financial institutions should also cultivate opportunities to help existing borrowers manage their business and capital needs. Doing so helps protect and grow those relationships and avoids starving economic growth. A recent Federal Reserve Bank of Atlanta paper estimates a tightening in bank credit supply of 1 percentage point is associated with an 11 percent decline in SMEs' net job creation rate. 

Comparatively, SMBs need to be ready to adjust operating practices and capital preservation efforts to manage the cash flows and capital outlays vital for their success. SMBs that don’t proactively manage their financials in this margin-stressed environment will find themselves with fewer borrowing options and more expensive costs for capital. 

Closing Summary

The current landscape of SMB lending is undeniably shaped by two dominant forces: the Federal Reserve's monetary policies and the financial institutions’ credit policies. Behind these two drivers is higher core inflation, which impacts SMB costs and margins while removing discretionary spending from the consumer. 

The data showcases a downward trend in SMB loan origination, and while the 90+ DPD rates for SMB loans originated in 2021 and early 2022 remain considerably below the standard run rate, there's a noticeable, albeit gradual, upward movement among more recent originations. 

Considering stresses on two other sources of operating capital often tapped by business owners and the end of student loan forbearance, financial institutions need to closely monitor market dynamics and adjust lending strategies accordingly to cater to the evolving needs of SMBs and mitigate potential risks. 

Win more small business deals and grow market share.

abrigo small business lending

About Abrigo Small Business Lending Intelligence 

Abrigo Small Business Lending Intelligence is a lending decision and monitoring engine powered by Charm Solutions. Embedded into the Abrigo loan origination platform, Abrigo Small Business Lending Intelligence provides real-time scorecards that include a loan risk rating score, probability of default, and details of how the score was calculated. Using Charm’s dynamic models along with existing processes, institutions improve their decision-making by incorporating an array of data sources and leveraging analytics to gain actionable insights. 

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About the Author

Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo’s platform centralizes the institution’s data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth. Make Big Things Happen.

Full Bio

About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

Make Big Things Happen.