Green Shoots at Last: Small Business Lending Finally Starting to Thaw

(MoneyWatch)  Take heart, small businesses -- big banks are beginning to lend to you again. For the first time since 2006, lenders are making it easier for companies with annual sales of less than $50 million to get "commercial and industrial" loans, according to the Federal Reserve Board's latest bank lending survey.

In particular, around one-fifth of large domestic banks reported having eased lending standards for small firms, which offset a net tightening of standards by a small fraction of other banks.

What small business owners and managers really want to know is this: Do banks' more stringent underwriting standards represent a return to a normal lending environment following years of easy money, or are financial institutions making it excessively hard to borrow even for creditworthy firms?

I wish I had a clear answer. Unfortunately, the evidence is mixed. Bankers say they're eager to lend, while conceding that heightened regulatory scrutiny of small business loans makes them gun-shy. Said Robert Hilson, a commercial banking executive with Bank of America (BAC), at a recent conference on small businesses' financing needs:

Some question about have underwriting standards changed. I would tell you that I think they have tightened somewhat over the last two years. But I'd also suggest that they are back to where they were before we saw the, you know, kind of the craziness leading up to the recession. In many cases, it's feeling different for clients now, as well, because we're asking for financial statements, in some cases, where we haven't asked for them in a number of years.

Yet many smaller firms still report difficulty getting credit, as Fed Board of Governors official Robin Prager noted at the same event:

Reductions in lines of credit, combined with declining sales, have left some small businesses struggling to meet intermediate term financing needs. Many small businesses are finding it difficult to refinance their loans, especially those associated with commercial real estate. Firms requiring small dollar loans less than $200,000 [are] having trouble finding lenders willing to participate in this relatively high-cost market segment. And financing for startups is virtually impossible to obtain.

U.S. Small Business Administration chief Karen Mills enlarged on this point, noting that even healthy firms are struggling to get a loan (click on video below to see her speech):

When I travel around, which I do a lot... 27 million small businesses are still saying they cannot get access to credit. And I want to make a point here -- these are not businesses who are about to fail.

Despite such challenges, lending conditions do show modest signs of improvement. Most bankers are no longer barring the door on small businesses seeking credit, as they would have last year. Big banks serving this segment also say they're taking more care to review loan applications, including letting borrowers appeal if they're rejected.

Sensing a business opportunity, JPMorgan Chase (JPM) has even launched a program that gives small firms approved for a new loan a half-point off the interest rate for every new employee they hire, with a maximum discount of 1.5 percent (Borrowers who do their business checking with Chase get an additional 0.50 percent rate-cut.)

You'll note it's mostly larger banks that are loosening up. Small banks, many of which are taking a beating on commercial real estate, remain tight on credit. That's a problem for many modest-sized companies, since banks with less than $10 billion in assets account for roughly 60 percent of small business lending.

Of course, there's another reason why it's hard to get a read on the lending environment for small businesses -- the sluggish economy. The major reason lending plunged to such customers over the last couple years is that they stopped borrowing, as tepid consumer demand choked off growth. If such conditions persist, possibly for years, tight credit could indeed become the new normal.


Image from Flickr user SqueakyMarmot
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