Banks tightened small business lending standards in the third quarter, while standards for larger firms stayed broadly unchanged, the Federal Reserve’s October Senior Loan Officer Opinion Survey shows. Released November 2, the survey tracks changes in lending standards, terms and reported demand from July through September, not actual loan volumes. For owners planning year-end borrowing, the figures show a modest shift, concentrated outside the biggest banks.
Key Takeaways
- Banks tightened small-firm loan standards in Q3; large-firm standards stayed broadly unchanged.
- Net tightening for small firms was about 5.1 points; 91.5% of banks made no change.
- Banks reported weaker C&I demand and cited less plant and equipment investment.
- Small-firm collateral rules and interest-rate floors tightened even as many loan spreads eased.
What the October Loan Survey Measured
Responses came from 61 domestic banks and 18 U.S. branches of foreign lenders, CNBC reported. A bank can report unchanged standards even if its requirements were already tight. Standards are the rules for approving an application. Terms are the price, collateral and covenants offered after a bank is willing to lend.
Small Business Lending Standards Versus Larger Firms
The Fed classifies small firms as those with annual sales below $50 million. Large and middle-market firms have annual sales of $50 million or more. That is a survey cutoff, not a legal definition of a small business.
Investozora’s comparison of the Fed tables shows 6.8% of domestic banks tightened commercial and industrial standards somewhat for small firms, 1.7% eased them somewhat and 91.5% made no change. The net tightening balance was about 5.1 percentage points. For larger firms, 6.7% reported tighter standards and 5.0% easier standards, a net of about 1.7 points the Fed treated as basically unchanged.
All 21 large banks, defined by domestic assets rather than borrower size, left small-firm standards unchanged. The four that tightened, and the one that eased, sat outside that group, Investozora found. Cobalt Intelligence’s count matches: 4 of 59 tightened and 1 eased.
| October survey measure | Small firms | Large and middle-market firms |
|---|---|---|
| Banks reporting tighter C&I standards | 6.8% | 6.7% |
| Banks reporting easier C&I standards | 1.7% | 5.0% |
| Net tightening balance | About 5.1 points | About 1.7 points |
| Moderately weaker loan demand | 15.3% | 18.3% |
| Demand about the same | 81.4% | 75.0% |
| Net weaker-demand balance | About 11.9 points | About 11.7 points |
Investozora calculated a July small-firm net of about 1.9 percentage points, versus about 5.1 in October, a rise of about 3.2 points. Applicable responses were 55 in July and 59 in October. Cobalt said October remained below January’s 8.9% net.
Terms, Premiums and Weaker Demand
Most C&I terms eased or stayed basically unchanged for firms of all sizes. For large and middle-market borrowers, 23.3% of banks reported narrower spreads over their cost of funds and 8.3% reported wider spreads, a net easing of 15 points on that term, Investozora calculated.
Banks reported tightening standards for premiums charged on riskier loans for firms of all sizes.
CNBC quoted that sentence from the Fed report. Small-firm terms diverged. KPMG’s survey note said banks reported stricter collateral requirements and greater use of interest-rate floors for those customers. Cobalt’s breakdown was small in bank count but same in direction: collateral tightened at 3 of 59 banks and eased at none, while spreads eased at 10 and tightened at 6.
Demand softened at the same time, as the table shows, with net weaker-demand balances of about 11.9 points for small firms and 11.7 points for larger firms. Banks pointed to less customer investment in plant and equipment and to borrowers moving toward other bank or nonbank funding that had become more attractive.
Of 12 banks explaining weaker demand, 10 cited that shift, a question that covers firms of any size, Cobalt reported. July had shown stronger demand from larger firms and basically unchanged demand from smaller companies.
What Tighter Bank Credit Means for Owners
Banks also tightened standards, and reported weaker demand, across construction, nonfarm nonresidential and multifamily loans. KPMG said banks tightened CRE standards the most in two years. Investozora noted July had generally shown easier CRE standards, with differences across property types.
On business credit intermediaries, including finance companies, leasing firms and marketplace lenders, 12 of 50 domestic banks tightened standards, 37 were unchanged and 1 eased, a net 22%, Cobalt reported. The survey counts banks, not dollars.
For the commercial and industrial shift, CNBC reported that lenders pointed to a less favorable or more uncertain economic outlook and a worsening of industry-specific problems. That reason is separate from weaker demand, which the survey measured on its own.
This is analysis of the figures above, not an additional Fed result: standards were unchanged at all 21 large banks that answered, while collateral, rate floors and risk premiums are where small-firm terms changed. Before a year-end draw, check three items:
- Whether collateral or an interest-rate floor changed, not only the spread.
- Whether a nonbank lender’s bank facility is near renewal, since loans to those intermediaries tightened on net.
- Whether an equipment request fits banks’ cited drop in plant-and-equipment investment.
Owners comparing borrowing costs can read earlier coverage of a Fed rate hold and small-business borrowing. Separate reporting covers EIDL collections, fees and wage garnishments.
