Small Business Loan Supply Tightens Says Fed
Small Business Loan Supply Tightens Says Fed
November 13, 2024
Bob Coleman
While the report addresses the entire scope of a lender’s portfolio, this analysis focuses on small business loans.
Terms for small business loans tightened over the third quarter. Large banks reported lending standards were basically unchanged for firms of all sizes during this period. However, smaller banks reported tightening lending standards and almost all terms for loans to small firms.
Banks reported having tightened collateralization requirements, loan covenants, and widened spreads of loan rates over their bank’s cost of funds for loans to small firms.
Banks that reported tightening standards or terms on Commercial and Industrial loans cited several reasons:
– A less favorable or more uncertain economic outlook
– Worsening of industry-specific problems
– Reduced tolerance for risk
– Increased concerns about legislative changes, supervisory actions, or changes in accounting standards
– Deterioration in the bank’s current or expected capital position
– Decreased liquidity in the secondary market
– Less aggressive competition from other banks or nonbank lenders
Regarding demand for C&I loans over the third quarter, a significant net share of banks reported weaker demand from large and middle-market firms, while a moderate net share reported weaker demand from small firms.
A moderate share of banks also reported a decrease in inquiries from potential borrowers regarding the availability and terms of new credit lines or increases in existing lines.
The most frequently cited reasons for weakening demand were:
– Decreased customer investment in plant or equipment
– Decreased customer inventory financing needs
– Decreased customer accounts receivable financing needs
– Decreased customer merger or acquisition financing needs