Main Street Monday: Small Businesses Squeezed — Fed Shows Credit Tightens for Main Street

August 18, 2025

Bob Coleman
Founder & Publisher

Main Street Monday: Small Businesses Squeezed — Fed Shows Credit Tightens for Main Street

The Federal Reserve’s July 2025 Senior Loan Officer Opinion Survey on Bank Lending Practices delivers a clear message for Main Street: small businesses are bearing the brunt of tight credit standards. While conditions have eased modestly compared to 2024, small firms remain at the sharp end of the lending squeeze.

Read the full Federal Reserve report here.

Small Business Lending: A Tough Road

The survey shows commercial and industrial (C&I) lending standards remain most restrictive for small and very small firms. Lenders reported:

  • Stricter collateral requirements
  • Higher risk premiums
  • Smaller credit line sizes
  • Shorter maturities
  • Tighter covenants

In contrast, large and middle-market firms experienced steadier terms, and in some cases even slightly narrower loan spreads.

Demand is also cooling. Significant shares of lenders reported weaker appetite from small businesses, tied to scaled-back equipment purchases, lower inventory financing, and fewer merger or acquisition transactions. Even inquiries for new or expanded credit lines declined.

CRE Lending: Conservative and Uneven

Commercial real estate lending followed a similar cautious pattern.

  • Standards tightened modestly for construction and nonfarm nonresidential loans.
  • Multifamily loan terms remained largely unchanged.
  • Large institutions leaned toward easing, while smaller institutions—where many small businesses turn—remained cautious.
  • Demand weakened overall, except at some large and foreign banks that reported stronger activity.

Historical Context: Still Tight by Any Measure

The Fed Survey asked banks to compare current lending standards against their historical ranges since 2005.

  • For C&I loans to small and very small firms, standards are still well into the tight zone, significantly more restrictive than those applied to large firms.
  • For CRE lending, standards also remain tight, particularly for nonfarm and construction credit.
  • Even though July 2025 looks somewhat easier than July 2024, small businesses remain at a clear disadvantage.

What It Means for Small Business Lenders

For small business lenders, the July Fed Survey underscores several realities:

  • Small firms face the most constrained access to credit.
  • Demand is weakening—not because small businesses do not need capital, but because many are deferring investments in uncertain times.
  • Larger borrowers retain more favorable access, widening the gap.
  • CRE lending remains cautious, particularly among community and regional institutions.

The opportunity for small business lenders lies in relationship-driven lending: structuring flexible deals, guiding business owners through tighter standards, and building loyalty that will endure when confidence and credit appetite return.