Three Small Business Lending Predictions For 2018
Rohit Arora Contributor
I write about small business lending and growth.
By many measures, the U.S. economy was strong in 2017.
The Dow Jones hit record highs multiple times during 2017, including a historic close of 24,754.06 on Dec. 22.
The S&P is up almost 20 percent this year and set records more than 50 times this year, and NASDAQ also hit many highs and approached 7,000 by the end of December.
The prospect of tax reform brought optimism to business owners. At the same time, consumer confidence hit a 17-year high, according to the Conference Board. Meanwhile, retailers reported a solid holiday shopping season.
GDP growth climbed to near 2.5 percent, according to estimates from the Federal Reserve.
Unemployment hovers near 4 percent, and fuel prices remain low.
The Trump Administrations pro-business attitude, which cuts regulations on many industries, including banking, helps spur business lending.
Banks opened up the purse strings in small business lending this year. With the Federal Reserve approving interest rate hikes three times in 2017, banks are charging higher interest and can close more profitable deals. This scenario increases the likelihood that they will lend. From the borrower's perspective, although rates have increased, they are still near historic lows. Thus, it is not too costly to secure capital if your credit score qualifies you for bank lending.
Jerome Powell, President Donald Trump's nominee for chairman of the Federal Reserve, testifies during a Senate Banking, Housing, and Urban Affairs Committee confirmation hearing on Capitol Hill in Washington, Tuesday, Nov. 28, 2017. (AP Photo/Carolyn Kaster)
Prediction No. 1: Interest Rates Will Continue to Climb Slowly
Outgoing Federal Reserve chair Janet Yellen is expected to step down in February 2018. There is no reason to suspect that her successor, Jerome Powell, would change the course dramatically, especially when the markets have been performing so well. The Fed increased its target federal funds rate three times in 2017. While the hikes have not been large, they do encourage banks to lend, and when borrowers believe they have a good chance of securing loans, they are likely to apply.
The slow, steady interest rate policy has spurred small business lending. According to the Biz2Credit Small Business Lending Index, big banks ($10 billion+ in assets) approved one-quarter of the small business loan requests they received in November. This is the highest approval percentage since the index began tracking loan processing in 2011. Small banks are granting almost half of their applications. Figures for banks represent a dramatic turnaround since the dark days of the so-called "credit crunch" that followed the collapse of Lehman Brothers a decade ago.
If interest rates keep climbing and the economy continues to chug along, we can expect optimism among both borrowers and lenders to remain. Thus, I expect small business lending to grow in 2018.
Prediction No. 2: Increased Partnerships Between Banks and FinTech Companies
Millennials now represent the largest segment of the U.S. population, and everyone knows they tend to do almost everything on their phones. If you have spent more than a few minutes with anyone under 30, they are constantly checking their phones for texts, Snapchat messages, sports scores, and just about everything else. Online shopping continues to grow by leaps and bounds, as does online banking – with much of it done on mobile devices. Indeed, it's safe to say that most Millennials have not even entered a bank branch unless it was to use and ATM.
So with branch banking becoming less and less relevant for the up-and-coming generation, banks have to change the way that they do business. Many of them are looking to partner with FinTech companies that enable them to digitize their transactions, including business loan applications. Lending institutions that continue to operate in an old fashioned way will see others take their market share. Just as consumers are gradually migrating away from brick-and-mortar stores, small business owners in search of capital are using online applications for small business loans, often doing so on weekends and during evening hours after the work day is over.
Millennials have grown accustomed to getting whatever they want whenever they want it. Technology has enabled them to do it. In fact, mobile applications now account for more than 50 percent of the volume of small business loans requests on Biz2Credit's platform. There is no end in sight for this trend.
Prediction No. 3: Use of Blockchain Technology Will Continue to Boom
While the skyrocketing value of bitcoin may come back down to earth, there is no doubt that cryptocurrency technology will grow. An investor who bought 10 bitcoins last December would have paid about $10,000; a year later, the value of those bitcoins increased more than tenfold.
Blockchain technology, originally devised for Bitcoin digital currency, creates an open global platform to store information from multiple sources. Think of it as a secure Google Doc spreadsheet that is available to thousands users in a network. The technology updates this spreadsheet similar to the way that an ATM transaction impacts accounts at two different banks.
Blockchain stores information on a shared database that is constantly reconciled and stored by a network that makes the records verifiable. The information is hosted on millions of computers simultaneously and is accessible to anyone on the network. This technology keeps track of money balances and transfers, transactions and much more. Expect use of blockchain technology to grow in the coming year.
Technological advances are driving all aspects of the economy more than ever before. Meanwhile, people are becoming accustomed to the speed and effectiveness that technology provide. This is true for all industries from retail to marketing and professional services and, of course, banking. Expect this to continue in 2018 and in the years beyond.
Rohit Arora
In 2007, I co-founded Biz2Credit, an online small business financing platform that uses technology to streamline the funding process. Previously, I worked for Deloitte C...