The number of loan applications being approved by big banks has peaked. In 2015, it was at 22.8%, which is a post-recession high, according to the Biz2Credit Small Business Lending Index.
To close out 2015, the Federal Reserve announced they would raise interest rates for the first time since the recession. Now, interest rates are starting again at 0.25% with a plan to increase this rate by 1% every year.
One of the first steps many franchisees take to securing their new business is getting a small business loan. For anyone considering getting a small business loan to open a franchise, this is good news.
Why the 2016 Small Business Loan Outlook is Positive
When the economy took a turn for the worst, franchisees struggled to get the loans needed to open their first business. Banks stopped approving loans because it was too risky.
In the last part of 2015, big banks and institutional investors approved 62.4% of loan requests. That’s another increase in the positive direction.
Still, not all financial institutions are eager to take risk. Smaller banks and credit unions have actually decreased the number of small business loans they’re awarding. In 2014, they averaged a 50% approval rate. In 2015, that rate dropped to below half of all requests. This is troublesome but the trend might not last.
Why Choose Big Banks Over Small Financial Institutions
The pattern of smaller banks approving fewer loans sends a clear signal that they’re not willing to take risk. Loans are how they make money. The fewer loans they take on, the less they’ll make. Although this fact paired with the increased interest rate by the Federal Reserve might make it easier for franchisees to get loans, many applicants are still looking to the larger banks for approval first.
One big reason for this is that the big banks are able to make decisions faster. Online marketplaces and lending platforms make it easier for small business owners and franchisees to submit their paperwork and get a response. Smaller banks and credit unions don’t have this technology, limiting themselves in the application process.
For Millennials who want to open their first franchise, this is attractive.
Millennials don’t place as high of an importance on personal relationships with bankers. Instead, this generation is more eager to see their new business come to fruition. With more Millennials becoming franchisees, it makes sense that this generation will trend toward the path of least resistance to get their business off the ground faster.
The Future of Franchise Lending
The future of lending is bright for franchisees. With the increased interest rate, fewer hurdles to cross and faster approval times, it’s a good time to open your first business.
