Trend shift: Older entrepreneurs find it harder than younger ones to obtain business loans

This text is based on Realtid's article "Trendbrott: Svårare för äldre företagare än för yngre att få företagslån", published on 25-05-2021.

Banks' risk appetite recovered in the first quarter of 2021 to the same levels as before the COVID-19 pandemic.

Banks' willingness to lend to businesses has recovered and, during the first quarter, returned to the same level as before the start of the pandemic in the third quarter of 2019. In total, 81 percent of loan applications were approved in the first quarter of 2021, compared with 68 percent in the second quarter of 2020, when the pandemic truly took hold.

Loan terms have also become more favorable during this period: on average, companies that selected an interest rate offer received 34 percent lower interest costs compared with the third quarter of 2019. However, while it has become easier for entrepreneurs born in 1990 or later to obtain loans, the lending situation for older business owners has deteriorated significantly during the pandemic. This is shown by a study of 7 300 loan applications conducted by Krea, the business loan comparison service, covering the period from the third quarter of 2019 to the first quarter of 2021.

How do you explain the deterioration in older entrepreneurs' ability to obtain loans after the pandemic?
– It has been surprising for us to see that the development has been so different. One reason we see is that younger entrepreneurs apply for smaller amounts compared with older business owners; on average, entrepreneurs born in 1990 or later apply for amounts that are 33 percent lower than those sought by older entrepreneurs', says Carsten Leth, Deputy CEO of Krea.

Precisely because Krea has identified the applied loan amount as an important factor in obtaining credit approval, Krea launched an AI-based service at the end of 2020 that helps companies apply for the right amount based on their financial circumstances.

– "We also see that younger entrepreneurs are more likely to add additional information about their company in the application. We believe younger individuals feel more comfortable using our technical solutions to automatically upload accounting data and bank account information", he adds.

In the third quarter of 2019, 69 percent of younger entrepreneurs received loans, compared with 78 percent in the first quarter of 2021, which Krea attributes to younger entrepreneurs operating in newer business segments. For entrepreneurs born in 1959 or earlier, the trend is the opposite; 93 percent of loan applications in this age group were approved before the start of the pandemic, compared with 76 percent in the first quarter of 2021. A similar trend also applies to newly established versus more established companies, which likewise have greater difficulty obtaining loans than companies founded after 2019.

Which segments find it easier to obtain loans, and why are lenders more willing to lend to these companies? Have these patterns changed during the comparison period Q2 2019-Q1 2021?

– "We have seen an improvement in the hotel and restaurant sector during the most recent quarter, particularly among companies run by younger entrepreneurs and newly established businesses, that is, those founded after 2019", says Carsten Leth.

The increased willingness to lend to these companies mainly stems from a small number of lenders increasing their interest in this segment. This is driven partly by lower funding costs for certain lenders, but also by the availability of information on companies' ongoing cash flows through Open Banking APIs, which makes it easier for lenders to assess restaurants' repayment capacity. The recovery for newly established companies has broader support from multiple lenders. One key driver is that several lenders offer products specifically tailored to startups, such as loans guaranteed by the European Guarantee Fund, featuring lower interest rates and, above all, limited personal guarantees, he explains.

However, the situation for female entrepreneurs, similar to that of older business owners, has deteriorated during the pandemic. While 82 percent had their loan applications approved in the third quarter of 2019, the figure fell to 78 percent in the first quarter of 2021.

In its report, Krea also highlights changes in credit assessment processes as an additional possible reason for the deterioration in lending conditions for older entrepreneurs and the improvement for younger entrepreneurs.

In what ways have lenders changed their credit assessment processes? Has this been transparent to customers? Has it occurred across all lenders?

– "It has not been explicitly communicated to customers, except when lenders launch new products or receive new funding. We see significant differences between lenders. Some have chosen, for example, not to extend credit to restaurants at all, while others have become more risk-tolerant specifically toward restaurants", says Carsten Leth.

Creditworthiness remains the most decisive factor in the pricing of loans. In this respect, companies with low creditworthiness as well as those with medium or high creditworthiness have seen improvements in loan terms. While companies with lower creditworthiness experienced a 27 percent increase in interest costs during the first wave of the pandemic, their interest costs are now lower than before the pandemic began. According to Krea, the improvement for companies with medium and strong creditworthiness paid an interest rate of 6,7 percent before the pandemic, compared with 4,4 percent today. For companies with strong creditworthiness, interest costs have decreased by more than 30 percent.

What do these trend breaks mean for the business loan market and for you as a company?

– "When lenders increase their willingness to lend to businesses, it creates better conditions for companies to secure financing on favorable terms, which in turn provides better opportunities for businesses - and ultimately for society - to grow."