Small Businesses Turn To Digital Lending As Banks Close Their Branches

Author: Saul Johns | March 20, 2019

For the last few years, the largest banks in the United States have been wincing their networks. According to a report by the LA Times, these banks have been closing down their branches in underprivileged neighborhoods.
S&P Global Inc. stated that in the last 4 years the number of branches closed was 1,915 more than the number of new branches opened. This shrinking of networks is happening despite the Community Reinvestment Act of 1977. According to the act, the banking regulators and the Federal Reserve should ask the financial institutions to pay attention to the credit needs of the communities where they conduct their business. These communities include neighborhoods with low and modest income.
According to a 2014 study done by MIT, the closing of branches in underprivileged neighborhoods make it hard for small businesses to get loan approvals. Hoai-Luu Q. Nguyen, a prominent economist said that after a branch closure the number of small business loans goes down by 13 percent for the next few years. Nguyen believes that these closing impact even the larger markets. A small business, to survive, needs easy access to capital. So, when banks start to close their branches in lower-income neighborhoods, the small businesses struggle to get the necessary financing to keep their operations running.
Fortunately, for small businesses or entrepreneurs in underprivileged neighborhoods, the solution has come in the form of online small business loan lenders. Online lenders offer many advantages to small businesses. The entire process of applying online saves the borrower from going to different banks for approval, which saves time, cost and manpower. The entire application process becomes more efficient and cost-effective. The borrowers can submit their applications even during non-working hours.
Biz2Credit Small Business Lending Index says that small business loan approval rate has gone up to 27.2 percent at big banks, which is the highest since the recession. Moreover, the current cost of capital is also low and many small businesses continue to apply for loans. Most of these companies have good performances to boost, which improves their chances of getting loan approvals.
In addition to the low cost of capital, the Federal Reserve has also reduced the rate at which it increases its regular interest rates. This has ensured that small businesses get a continuous flow of capital at lower costs.
In an interview with 60 Minutes’ Scott Pelley, Jerome Powell the chair of Federal Reserve said that the economy is currently doing well and the outlook looks good as the inflation is under control. During Powell’s reign, the interest rates went up four times. Powell also said that economic growth in 2019 may be slower as compared to last year, but it will continue to grow at a healthy rate.
The economy is still facing its share of problems. The impact of the government shutdown was felt earlier this year as the approval rate for business loans by small banks went down to 48.6 percent in February from January’s 49.8 percent. The shutdown created a backlog of small business loans. Regional and community banks are responsible for processing these loans.
Despite these setbacks, 50% of all small business loan applications are getting approvals, which presents a positive outlook. Moreover, the small business loans approval rate remained steady in February this year. And overall, the economy does not face any macro problems. Despite a slow year for economic growth, the current environment is good for small businesses.

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