Small business owners need to keep an eye on trends in the lending industry so they can estimate their future borrowing costs and determine how to finance their ventures. The following are a few trends in the 2016 small business loan forecast that any company potentially seeking financing this year should be aware of:
Gradual Increase in Borrowing Costs
In December 2015, the Federal Reserve increased its interest rates for the first time since 2006, according to CNN Money. It was a small increase of only 0.25 percent, but the Fed has indicated that it may raise rates further over the course of 2016. Because lenders base their rates on the Fed's rate, this means that borrowing costs for small business owners could gradually increase in 2016.
Fed rate increases have the biggest impact on loans with variable interest rates and short-term loans of five or fewer years. Borrowing costs for longer business loans should not change significantly in 2016. As a result, some business owners are seeking loans sooner than planned to lock in the low rates before borrowing costs go up.
Higher Loan Approval Rates
Small business owners should have a much easier time qualifying for loans than they did in the past few years. According to Small Business Trends, large banks currently approve roughly twice as many small business loans as they did in 2014, and approval rates are the highest they've been since the end of the last recession. The economy is stronger, so banks are not as worried about lending money. In addition, the higher Fed interest rates give banks a bigger profit margin on small business loans, so they may be more willing to lend.
Growth in Online Small Business Lending
Technology is rapidly changing the lending industry with the emergence of new online lenders. To compete in this new market, large banks are also developing their own online platforms for small business loans. While online lending will still be a relatively small part of total lending in 2016, its share of the market will continue to grow.
Fewer Loans From Credit Unions
Credit unions are currently struggling to attract small business owners because they are having trouble matching the faster processing times and lower rates of large banks and online lenders. Credit unions also typically do not have the resources to launch their own online platforms. Their market share of small business lending has fallen over the past few months and will likely continue to decline during 2016, according to the Small Business Trends piece above.
Overall, the 2016 small business loan forecast brings good news for small business owners. Borrowers should have an easier time both finding and qualifying for loans while interest rates are not likely to rise too quickly this year.