Credit Conditions Cautiously Optimistic says KC Fed
October 20, 2025
Bob Coleman
Founder & Publisher, Coleman Report
Main Street Monday: Credit Conditions Cautiously Optimistic says KC Fed
Small business credit conditions are showing cautious optimism this fall, according to new data from the Kansas City Federal Reserve and the Bank of America Institute. The tone from both sources suggests a steady—if uneven—recovery across Main Street.
Small business credit conditions are showing cautious optimism this fall, according to new data from the Kansas City Federal Reserve and the Bank of America Institute. The tone from both sources suggests a steady—if uneven—recovery across Main Street.
Lending Momentum Continues
In the second quarter of 2025, new small business lending increased 7.5% from both the prior quarter and the same period last year. That’s a welcome rebound after 2024’s tightening cycle. The Federal Reserve’s survey of 121 lenders shows term loans outpacing credit lines, signaling renewed interest in long-term capital expenditures rather than short-term liquidity.
However, bankers note a persistent decline in borrower credit quality, a trend that has stretched across multiple quarters. Looking ahead, lenders expect labor costs, inflation, and trade policy to dampen loan demand over the next year, even as interest rates, tax policy, technology adoption, and regulatory clarity provide tailwinds.
Credit Stress Still Contained—for Now
Bank of America’s internal data shows small business credit card balances per client were up 3% in September from the 2024 average, with utilization rates only slightly higher. That modest divergence may suggest some small firms are carrying balances longer or delaying payments, but overall credit stress remains limited.
The Senior Loan Officer Opinion Survey (SLOOS) echoes this stability. The net percentage of banks reporting tighter standards for small firms has eased slightly since January—and remains below the tightening levels seen for large commercial borrowers.
Payments Pulse: Spending Still Positive
On the payments side, total small business transactions rose 3.7% year-over-year in September, according to Bank of America. Debit card volumes led the way, up 5.8%, while credit card activity slipped 0.4%. The data indicates that while small businesses continue to spend, many are keeping a closer eye on cash flow and avoiding additional debt.
The Banker’s Takeaway
Main Street may not be booming, but it’s far from bust. The credit appetite is cautious, but the capital expenditure growth trend—paired with a slowdown in tightening—offers a solid foundation heading into year-end.
As one regional banker summed it up:
“The demand is there. The difference now is we’re underwriting for durability, not desperation.”