Is the Small Business Credit Crunch at a Turning Point?

Is the credit crunch for small businesses approaching an end? There’s a hopeful sign in the survey of senior loan officers out from the Fed today (PDF): One of the 55 banks survey reported that it had eased credit standards for lending to small firms (under $50 million in sales) over the past three months.

Of course, 19 reported tightening standards over the past three months, and most said they stayed the same. The chart below tracks the net percentage of banks tightening lending standards — as long as the dotted line is above zero, that means that on the whole more banks surveyed have tightened credit than eased it over the past quarter.

Net Percentage of Domestic Banks Surveyed Tightening Standards for Commercial and Industrial Loans. Source: Federal Reserve

As you can see, the last time more banks in the survey eased small business credit than tightened it was at the end of 2006. Recent surveys have shown no banks at all easing credit and many more tightening it somewhat or considerably. So the presence of one bank of the 55 surveyed reducing credit standards over the last three months is a positive sign.

This survey asks about conditions over the last three months, so when a bank reports that it has tightened credit, that means raising standards from what they were in April 2009. By that point banks had already dramatically curtailed lending, pulling back throughout 2008. (Loan demand also continues to slacken, as fewer businesses look to expand, invest in equipment, etc., because of the weak economy.)

On the whole, the survey shows that we may be approaching a turning point where credit standards for small business borrowers level off and begin to ease. But for now, many more banks are still raising credit standards than easing them, albeit not as severely as over the last year.

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