September 24, 2024 — Demand for small business loans dropped in the first half of 2024 as companies reevaluated borrowing needs in the face of elevated interest rates and concerns about a possible economic downturn. 

The recent Federal Reserve rate cut, combined with a steady decline in loan pricing, could contribute to the revival of loan volumes in the second half of this year by enticing small businesses to resume borrowing. 

“Despite some noteworthy differences among new borrowers, renewals, and high- and low-risk companies, small businesses overall are seeing lower prices on loans,” says Gregory Schneider, Director of Commercial Loan Analytics at Coalition Greenwich. “Following the Fed’s rate cut last week, we expect lower borrowing costs to at least partially revive demand among small businesses and reverse the downward trend in loan volumes.”  

Large Banks and Online Lenders See Uptick in Loan Applications
Online lenders accounted for nearly a quarter of small business financing applications in 2023. The popularity of online lenders has increased dramatically since the onset of the pandemic—especially among companies that might struggle to get affordable loans from banks. A sizable majority of applications submitted to online lenders last year came from small businesses that qualify as medium- to high-risk borrowers. Small businesses who apply for loans from online lenders say they are attracted by quick credit decisions, the lack of collateral requirements and what they perceive to be a greater chance of actually getting funded. 

Applications for financing have also been on the rise for large banks, which have emerged as the most reliable source of credit for U.S. small businesses, while fewer small businesses have been submitted financing applications to small banks. 

“It will be interesting to watch how small businesses who have turned to large banks behave in coming months, given that only 60% of borrowers from large banks say they were satisfied with their experience, versus 80% of borrowers with small banks and credit unions,” says Gregory Schneider.

Greenwich Commercial Lending Market Insight is a quarterly review of data and analytics from the Greenwich Commercial Loan Analytics team.