Banks tightened small-firm credit again in October, and construction loans most of all

Banks made credit harder to get for small businesses over the third quarter, according to the Federal Reserve’s Senior Loan Officer Opinion Survey released Nov. 2 ^[1]. Standards for large and middle-market firms were basically unchanged ^[1].

Banks that tightened most often cited a “less favorable or more uncertain economic outlook” ^[1].

Small firms face more collateral and rate floors but slightly easier spreads

Four of 59 banks tightened standards for small firms somewhat, and one eased ^[3]. On terms, a net 5.1% raised collateral requirements and a net 6.9% made more use of interest rate floors, while a net 6.7% narrowed spreads over their cost of funds ^[3].

Small-firm loan demand weakened as well. Nine banks saw weaker small-firm demand and two saw stronger, for a net −11.9% ^[3].

Construction loans saw the most tightening and the weakest demand

NFIB’s survey shows the change more in loan pricing than in access. A net 3% of NFIB members said their last loan was harder to get, unchanged, and a net 8% said they paid a higher rate, up 4 points ^[4].

How to use this

For small business owners

1. Ask your bank in writing whether your line has an interest rate floor and what it is. A net 6.9% of banks used more floors on small-firm loans ^[3], and a floor can keep your rate up even if the Fed cuts.
2. Prepare a collateral schedule before a renewal. A net 5.1% of banks asked small firms for more collateral ^[3], so list equipment, receivables and real estate with current values instead of waiting for the bank to ask.
3. Compare a spread quote from a second lender. A net 6.7% of banks narrowed spreads for small firms ^[3], so a better rate may be available even as standards tighten.

For developers and small landlords

1. Start construction loan conversations earlier and with more equity. A net 15.6% of banks tightened construction and land standards ^[3], so ask a lender for its maximum loan-to-cost and its presale or preleasing rule before you tie up land.
2. In metro Atlanta, construction employment fell by 5,100 jobs, or 5%, in the year to September, the largest drop of any metro ^[5]. Fewer local construction jobs suggest contractors there have less work lined up, so builders who can still get financing could ask subcontractors for sharper bids.

For landlords who lease to small businesses

1. Ask new tenants how they are funding buildout, and get a lender’s commitment letter if a loan is involved. Tighter small-firm standards and weaker demand ^[3] could make it more likely that a tenant’s financing falls through after you sign the lease.
2. Keep a security deposit or guaranty that covers the months you would need to re-lease. NFIB members paid an average short-term rate of 8.2% in September ^[4], so a tenant that borrows to cover a slow quarter pays more than it did a year ago.