When it comes to small-business financing, entrepreneurs who apply for a loan in November typically have a lot to be thankful for, according to an analysis of Lending Club loan data. But borrowers who wait until December will find a much different picture.
NerdWallet examined almost four years of data on small-business loans from Lending Club, the largest online peer-to-peer lender, and found that the last month of the year had the lowest acceptance rate on average. Borrowers approved for a business loan in December paid a price: the highest average interest rate for any month of the year.
For many small-business owners, applying for funding any time of the year is one of the biggest challenges. To learn about small-business loans, read NerdWallet’s free e-book.
Best month, lowest rate
The analysis revealed that on average November had the highest acceptance rate for business loan applications at Lending Club. These loans also came with a low-risk premium — or the interest rate above the U.S. Treasury rates charged to buyers — which translates into lower interest rates. After the up and down at year’s end, loan approval rates were higher in the first months of the new year.
Small-business owners take out loans for a variety of reasons, from starting or expanding a business to funding working capital needs, such as buying inventory. Lending Club is one of many options for entrepreneurs. To learn more about business financing, see NerdWallet’s comparison of small-business loans.
Lows and highs. Since 2012, only 2.9% of Lending Club applications made in December have been accepted, the lowest rate of any month, and borrowers who receive loans pay an average interest rate (excluding any fees) of 16.34% above the 5-year U.S. Treasury rate, the highest of any month.
Lending standards at Lending Club don’t change from month to month, so the drop in acceptance rates in December is likely caused by a decline in the quality of the applicant, according to NerdWallet’s analysis.
Lending Club rates each applicant’s creditworthiness with a grade of A, for the highest-quality borrowers, to G, for the lowest-quality or highest-risk borrowers. In December, borrowers who receive grades of A, B or C make up 36.1% of approved loan applications — one of the lowest levels in the year.
Lenders want to make sure they earn a fair return on their investment, so if the quality of borrowers is low, then it follows that the acceptance rate for loans is also low and interest rates are high to compensate for the risk.
Why December seems to bring out highest-risk borrowers isn’t clear; Lending Club didn’t provide an explanation when NerdWallet inquired about data for the last month of the year. But one possible reason may have to do with inventories.
Across the U.S. economy, the biggest inventory increases happen in October. If a business takes delivery of inventory in October and suppliers require payment within a certain period — in 60 days, for example — those payments would be due in December. Some businesses facing that cash crunch may need to turn to a small-business loan to cover costs.
There’s always the new year. While December might be the worst time of the year for small-business loans, the data show that the quality of the pool of loan applicants at Lending Club improves with the new year.
The acceptance rate of loans jumps to 4.5% in January from December’s 2.9%. In February, the rate climbs to 5.1%, even as 64% of approved loans are for borrowers rated a “D” or lower, which is similar to December’s 63.9%.
States of acceptance. The higher rates of loan approval for applicants in some states mirrors the stronger credit scores of residents, especially those in the Midwest, who tend to have the highest scores in the nation. Of the 46 states with at least 100 loan applications from January 2012 to September 2015, here are the five with the highest rates of loan approvals at Lending Club:
- Utah: 6.41%
- Montana: 6.35%
- Nevada: 5.53%
- Minnesota: 5.44%
- Colorado: 5.21%
NerdWallet analyzed 177,451 Lending Club applications for small-business loans, both accepted and rejected, from January 2012 to September 2015. Risk premium is defined as the interest rate charged by the lender in a given month minus the five-year U.S. Treasury rate in that month.
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