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Community banks most likely to approve small business loans

January 22, 2015
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According to a recent survey from four Federal Reserve Banks, small regional and community banks have the highest approval rate for small business loans. Over the first half of 2014, these banks, with an approval rate of just under 60 percent, beat out large national banks (31 percent), large regional banks (45 percent) and online lenders (38 percent). Yet, these smaller institutions were the third most popular option among applicants – both large banks and large regional banks received more small business loan applications than their community bank counterparts.


The 2014 Small Business Credit Survey was a joint operation conducted by the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia. Its goal was to capture the perspectives of small businesses with less than 500 employees across ten states.

Small regional and community banks had a much higher approval rate (90 percent) for those firms classified as “Growers.” These “Growers” are categorized by the Federal Reserve as firms that are profitable and have increasing revenues. Large banks, on the other hand, had a 53 percent approval rate for these firms. Within this sector, small regional and community banks moved up to the second most popular source for applicants.

These higher-than-average approval rates can be correlated to community banks’ credit portfolio expansion to include more small business loans, as was noted in the FDIC’s most recent Community Bank Performance report. While the approval rates are high and portfolios are expanding, the OCC did point out that lending standards continued to soften. In fact, its 2014 Survey of Credit Underwriting Practices noted that 2014 marked a third consecutive year of eased standards.

Looking at the bigger picture, just over 20 percent of all surveyed firms applied for credit in the first half of 2014. Demand was weaker among firms with under $250,000 in revenue, as only 18 percent applied for credit. That compares to over 30 percent for those between $250,000 and $10 million in revenue, and 58 percent for those over $10 million.

Firms seeking credit had varying purposes for doing so, but among the most popular were expanding their business, funding day-to-day operations and replacing capital assets. The most popular financing products for which small businesses applied included lines of credit, business loans, credit cards and SBA loans. And there was stronger demand for smaller loans, as over half of applicants sought less than $100,000. Only 28 percent sought more than $250,000.

For the 44 percent of firms who applied but failed to receive any credit, the top three reasons included a low credit score, insufficient collateral and/or weak business performance. The primary impact on businesses whose applications were denied was delayed business expansion.

In today’s market, community banks continue to compete for small business loans, not only with larger banks and online lenders, but also with each other. While they continue to be a viable source, community banks’ main value proposition is their ability to undertake and maintain a personal relationship with borrowers – something that is more difficult or impossible for larger banks and online lenders.

To further business loan activity, and compete for the top borrowers, bankers often need to do more to incentivize potential customers. To learn three ways to accomplish this, bankers can access this complimentary whitepaper: Doing More for Business Borrowers.

About the Author


Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest

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