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Fed Survey: Banks Loosen Credit to Small Businesses

For the first time in four years, banks report easing standards on loans and credit lines to small businesses.

For the first time since late 2006, banks have loosened lending standards for small businesses, according to a Federal Reserve report released on Monday.

In its most recent quarterly survey of bank lending practices, the U.S. central bank found that loan standards were easing mostly at the largest U.S. banks over the three months ended in July.
 
Banks reported easing credit standards for large and mid-sized businesses in the Fed's April survey, but the latest results are the first sign of relaxing credit for small companies.

Eight of 55 respondents said they eased lending standards for small firms somewhat, while 80 percent said standards remained basically unchanged. Still, even a modest improvement is welcome in the current brutal lending environment for small businesses. A recent National Small Business Association survey found that 41 percent of small-business owners can't obtain adequate financing, the highest percentage in 17 years. In a separate July study by the National Federation of Independent Business, 91 percent of small-business owners said they couldn't get the credit they needed.

The Fed described the lowered spreads on loan rates and the trimmed costs of credit lines -- the way most banks have eased up -- as a "modest unwinding of the widespread tightening that has occurred over the past few years."

The July survey of loan officers at 57 U.S. banks and 23 foreign banks doing business in the country found that the most improvement came in loan areas where banks were facing competition to offer credit. For The Fed's survey purposes, a "small firm" is one with annual sales of less than $50 million.

Last month Federal Reserve chairman Ben Bernanke urged banks to lend more to small businesses, noting that large companies -- who have easier access to credit and can tap capital markets -- are showing strong earnings while smaller ones struggle.

"Making credit accessible to sound small business is crucial to our economic recovery and so should be front and center among our current policy changes," Bernanke said at a day-long forum on small-business financing in Washington in July. From February 3 to June 30, the Fed crisscrossed the U.S., holding 43 meetings on the cash needs of small businesses.

It will be September at the earliest before legislators offer any more help to small businesses wanting loans. Before leaving for its August recess, Congress failed to pass a bill that would make Small Business Administration loans more available and provide community banks with up to $30 billion in cheap capital to support small business loans.  

Inc. contributing editor Courtney Rubin was for five years a London-based staff writer for People magazine. Rubin, a former senior writer for Washingtonian magazine, has written for the New York Times magazine, Time, Marie Claire, and other publications. She is the author of The Weight-Loss Diaries.