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Federal Reserve Reports Easing of Small Business Lending

The Federal Reserve reports banks eased lending standards and terms to small businesses between April and July, which signals a modest unwinding of the widespread tightening that occurred over the past few years, the Federal Reserve said.

It is the first time the Federal Reserve has seen an easing of standards on loans to small firms since late 2006. Banks pointed to increased competition in the market for loans as an important factor behind the recent easing of terms and standards. Demand for small business loans did not change significantly since the last time the Federal Reserve conducted a survey in April.

Domestic banks also reported they had stopped reducing the size of existing credit lines for commercial and industrial firms. It is the first time banks have not cut such lines since these questions were added to the Federal Reserve survey in January 2009.

Almost all of the banks surveyed said they have eased lending standards because they are facing more aggressive competition from other lenders. Banks that reported higher lending demand from small businesses, said they are seeing small businesses shift their borrowing back to their banks from other credit sources and that small businesses are reporting increased financing needs for inventory and receivables.