Small business loan approval percentages at big banks (more than $10 billion in assets) fell from 13.3% in July to 13.2% in August, according to the latest Biz2Credit Small Business Lending Index. August’s figure represents a nearly 2% drop from August 2022, when approvals from the largest banks stood at 15.1%. Big bank lending to small businesses has now dipped every month since June 2022.

“If you are a small business looking for funding, you will have a difficult time securing it from big banks. We have seen it for more than a year,” Rohit Arora, CEO of Biz2Credit, said. “Big banks always had deposit money on hand. They always thought of it as permanent cheap capital. Now the interest rates are higher.

“Further, the branch systems that big banks built are expensive to maintain, and I expect that they will shrink. Banking has increasingly gone digital, especially post-COVID, and it’s not going back.”

Small banks are still more reliable sources of small business loans because they typically process more government-backed SBA loans that reduce lenders’ exposure to risk. Regional and community banks continue to experience approval percentage increases, with approval rates rising from 18.9% in July to 19.1% in August. However, the figures are far below where they were before the COVID-19 pandemic. For instance, in February 2019, small banks granted more than half (50.3%) of their business funding requests.

“Following the collapse of [Silicon Valley Bank] and other mid-sized banks, we increasingly see depositors taking money out of banks and putting it into U.S. treasuries, money market accounts and elsewhere. They have less money available to lend,” Arora said. “In recent years, smaller banks became more active in commercial real estate loans and did not see the bottom falling out in the commercial real estate market. I suspect we will see downsizing and forced acquisitions in the coming months. Many mid-sized banks have high exposure in commercial real estate. This situation can only hurt small business lending.”

The approval rates of institutional investors rose from 27.3% in July to 27.4% in August, while alternative lenders improved from 29.3% in July to 29.5% in August.

“Institutional investors and other non-bank alternative lenders remain frequent sources of capital for small businesses, although the interest rates they charge are typically higher than the rates of bank loans,” Arora said.

Approval rates at credit unions returned to their all-time low number of 19.8% in August, down 0.1% from 19.9% in July.

To determine its Small Business Lending Index, Biz2Credit analyzed loan requests from companies in operation for more than two years with credit scores above 680. The results are based on primary data submitted by more than 1,000 small business owners who applied for funding on Biz2Credit’s platform.