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The approval rate for small business loans at major banks (assets over $10 billion) slowed for the first time since June this year, remaining at 13% in November 2023, according to the latest data Biz2Credit Small Business Lending Index™Posted on Tuesday, December 12th. Meanwhile, small bank approval rates continue to climb as the new year approaches, going from 19.5% in October to 19.7% in November, marking an increase every month since June 2023.
While it’s good to see something other than a drop in loan approval rates from the big banks, there’s still a lot of work to do to get back to pre-pandemic numbers. As this year comes to a close, it remains positive that small banks have started to become a bigger option for business owners looking for capital. Hopefully this trend will carry over into Q1 2024 and beyond.
Fortunately, at the Federal Open Market Committee (FOMC) meeting on Wednesday, December 13, the Federal Reserve announced that there would be no interest rate hike for the third month in a row. Even better for borrowers, the central bank indicated it had kept interest rates on hold for a third straight meeting and signaled there could indeed be three cuts next year in 2024.
In its policy statement, the FOMC said the latest indicators showed growth in economic activity slowed from its strong pace in the third quarter. Job gains have slowed from earlier in the year but remain strong, and inflation has eased over the past year, although it remains high.
In an effort to reach its target inflation rate of 2%, the Fed has been aggressively raising interest rates since March 2022. However, this trend may end as the FOMC decided to keep the target range for the federal funds rate at 5 1 / 4 to 5 1/2%. This results in interest rates on SBA 7(a) loans between 10.75% to 13.25%
“In light of the uncertainty and the risks and how far we’ve come, the committee is proceeding carefully. We will continue to make our decisions based on the mix of incoming data and their implications for the outlook for economic activity and inflation,” Fed Chairman Jerome Powell said. “The committee will take into account the cumulative tightening of monetary policy, the lags by which monetary policy affects economic activity, inflation and economic and financial developments.”
“We remain committed to reducing inflation back to our 2% target and even if long-term inflation expectations are well anchored,” he added. “Restoring price stability is essential to pave the way for maximum employment and stable prices in the long term.” The Fed will do everything possible to achieve our goals of maximum employment and price stability.
Powell explained that if the economy develops as projected, the appropriate level of the federal funds rate would be 4.6% at the end of 2024, 3.6% at the end of 2025 and 2.9% at the end of 2026
Reduced borrowing costs provide an opportunity for small business owners to reinvest in their businesses, whether it’s replacing existing equipment or expanding to new locations. Hopefully, lower interest rates will allow more business owners to borrow at more reasonable rates next year.
The approval rating of institutional investors rose again from 27.6% in October to 27.7% in November, while alternative lenders also increased from 29.9% in October to 30% in November. However, non-bank lenders tend to charge higher interest rates than banks. Thus, the cost of capital has become increasingly expensive over the past year and a half.
There is now a real possibility that interest rates will be cut several times in 2024. This would be welcome news for small business owners.
To watch President Powell’s press conference on Wednesday, December 13, 2023, Press here.
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