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State of Small Business Lending

Donna Fuscaldo
Donna Fuscaldo

It's a good time to be in the market for a small business loan. Interest rates are low, lenders have money to put to work, and underwriting standards are easing.

Supply-chain delays, worker shortages and rising wages make it costlier for small business owners to capitalize on pent-up pandemic demand – especially heading into the holiday season. 

But that doesn't mean they have to lose out on what is forecast to be a strong holiday season and beyond. Financing options abound, as banks and non-banks continue to open their coffers to the nation's small businesses.

For several months, loan approvals have been slowly rising across all lender types except credit unions. According to the Biz2Credit Small Business Lending Index, alternative lenders led the pack in October, approving 25.6% of borrowers. That's up from 25.4% in September. Big banks approved 14.1% of loans, up from 14%. Meanwhile, small banks approved 19.7% of loan applications, a 0.2% increase. 

"Lending is coming back, more from alternative sources, but also smaller banks are increasing their lending again," Rohit Arora, CEO of Biz2Credit, told 

In addition to a willingness to lend, many are relaxing their standards. "Since businesses got $1.3 billion in forgiven loans [during the pandemic], lenders can afford to be less stringent," Arora said. 

Many businesses' sales are up this year, he said, and their debt is a lot lower than in 2019, which also helps.  

Did you know?Did you know? When we set out to find the best business loan providers for small businesses, we focused a lot on alternative lenders. We know they are more willing to work with all kinds of small businesses, require less paperwork and offer fast funding. But there's a catch: The cost to borrow is typically higher.

SBA sets non-pandemic loan volume record 

It's not just small banks and alternative lenders increasing the pace of lending. The U.S. Small Business Administration, which proved to be a lifeline during the pandemic, is also setting lending records. Earlier this month, the SBA announced it backed $4.8 billion in small business funding in fiscal 2021 through more than 61,000 traditional loans. That doesn't include the $1 trillion-plus in COVID-19 relief the SBA meted out since the pandemic began. Loan volume for its 504 loan program increased 41% this year. 

The SBA expects another busy year in 2022, with a lot of the volume driven by lenders looking to reduce their exposure. "Concerns over the pandemic in the economy are adding some risk," said Alan Haut, district director for the SBA North Dakota Office. "Lenders, banks and credit unions typically don't like a lot of risk. An SBA guarantee helps reduce that in an unsure environment."

Stigmas among business owners fade

Lenders' willingness to issue various types of small business loans is increasing at the same time the stigma associated with borrowing is disappearing. In a recent PayPal survey, 44% of small business owner respondents said they were now more willing to apply for a small business loan than prior to the pandemic, and 1 in 3 said they plan to seek funding in the next year. 

"The pandemic created a lot of stress, and small businesses needed to reinvent themselves," said Bernardo Martinez, vice president of global merchant lending at PayPal. "They are embracing their new roles online and are really trying to invest in those areas. They need capital they may have not needed in the past." 

Of the business owners in PayPal's survey, 1 in 5 said they need cash to boost their email and social media marketing, while another 20% want to scale up. During the holiday season, business borrowers are putting loans toward marketing and advertising, building their online presence, and selling in new marketplaces.

TipTip: It may be too late to stock up on inventory for the holidays, given the supply-chain chaos, but small business owners should already be preparing for 2022. Valentine's Day and Easter are just around the corner.

Where can small businesses get funding? 

It's a good time to be a small business owner if you need funding. There are various options to secure capital. With interest rates hovering at pandemic lows, borrowing is also cheaper. 

Take banks for starters. The big ones aren't lending, but the smaller ones are. "Community banks make up 43% of all business loans, more than 40% of agricultural loans, and more than a third of commercial real estate loans," said Orvin Kimbrough, chairman and CEO of Midwest BankCentre. 

These local banks have relationships with their small business customers, which helps during the underwriting process. Still, getting approved for a bank loan can be arduous. It requires a lot of paperwork, which is why 16% of business owners in PayPal's survey said they didn't apply for a business loan. 

Small business owners have choices outside of bank loans, though. They can borrow against their current and future sales with working capital loans and merchant cash advances. These loans typically require much less paperwork, and funding can be quick. 

FYIFYI: In our review of Rapid Finance, we found that it can get the money into a borrower's bank account in as little as 24 hours after approval. You can learn more about lenders that provide money quickly in our review of SBG Funding and our Balboa Capital review.

Short-term loans and equipment financing are other popular options from banks and alternative lenders. Short-term loans – which are often used for cash flow, inventory, or promotions that yield direct results – have terms of no more than 18 months. The underwriting is less arduous and the funding is quick. Our review of Fora Financial found that it maxes out its terms at 15 months. Business lines of credit and microloans are other options for small business owners. 

Bottom LineBottom line: Small business owners have a lot of options for funding. If you have time for the longer process, a bank loan is a good choice. If you need fast funding, consider working capital loans and merchant cash advances.

Money is flowing to small business owners again, but that doesn't mean every loan is right for you. Before you select a loan, figure out why you need the money and for how long. If it's to purchase more inventory ahead of the holidays, a working capital loan or merchant cash advance may be a good option. If you need to purchase expensive machinery, equipment financing is a better choice.

"What is the use for the funds? Are you just patching up a hole, or is it in fact to fuel growth?" said Hal Shelton, SCORE mentor and angel investor. "There has to be a benefit. How much will you get, are you able to pay it back, and will you have something left over?"

Image Credit: photofriday / Getty Images
Donna Fuscaldo
Donna Fuscaldo Staff
Donna Fuscaldo is a senior finance writer at and has more than two decades of experience writing about business borrowing, funding, and investing for publications including the Wall Street Journal, Dow Jones Newswires, Bankrate, Investopedia, Motley Fool, and Most recently she was a senior contributor at Forbes covering the intersection of money and technology before joining Donna has carved out a name for herself in the finance and small business markets, writing hundreds of business articles offering advice, insightful analysis, and groundbreaking coverage. Her areas of focus at include business loans, accounting, and retirement benefits.