Small-Business Loan Rates Drop Sharply

New data from the Federal Reserve confirms that the cost of borrowing has decreased -- and is likely to go even lower

Memo to Alan Greenspan: Slashing interest rates is working, at least when it comes to small commercial loans.

New data from the Federal Reserve's first-quarter survey of banks show rates on business loans of less than $100,000 dropped to 9.45%. That's down from 10.32% in last year's final quarter and 10.36% at midyear, putting rates at about the same levels that prevailed during the boom of late 1999.

On larger loans of up to $1 million, rates stood at 8.63%, down from 9.65% in the prior quarter and off more than a full point from their peak in the third quarter of 2000. What's more, since the survey was conducted in early February, before the Fed's latest rate cuts, borrowers are likely to see even better deals at the bank today.


  Another bright spot is that bankers may have finished tightening up on key provisions: Requirements for collateral, calls, and prepayment penalties saw little change vs. the fourth quarter. That meshes neatly with other surveys by both the Fed and private groups showing weak demand for small-business loans over the past two years, regardless of whether rates and terms were getting better or worse.

With the economy slowing and the specter of a recession looming, the question now is whether anyone wants to borrow money regardless of the price.

A complete look at current data on small-business credit markets -- including rates, terms and forecasts -- can be found in BusinessWeek Online's Small Business Rate Report.

By Rick Green in New York

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