In January, the Federal Reserve released the results of its quarterly survey of senior loan officers' opinions about trends in bank lending practices.
As part of the Fed's effort to stay abreast of banking trends, the senior loan officer survey gauges changes in credit market demand and supply trends over the past quarter, and it identifies expected changes for the coming year. The survey also gives potential borrowers insights about credit markets.
The study shows that in late 2017, banks tended to ease lending standards for business borrowers with more than $50 million of sales, but held them stable for smaller firms. The review also shows that relaxing their lending standards is one tool larger banks use to respond to competitive threats from smaller banks and nonbank lenders. Here are three takeaways borrowers can glean from the January 2018 Fed survey as it relates to commercial and industrial loans:
- Demand for credit trended positively in late 2017 for the first time in more than a year, and loan officers expect those levels to hold in 2018.
Roughly two-thirds of loan officers said demand for loans from all sizes of borrowers in the fourth quarter was about the same as in the third quarter. A similar portion of respondents said their outlook for 2018 demand was the same as levels observed in late 2017.
However, for the first time in more than a year, the number of respondents who said demand grew outpaced those who said it fell. This result lines up with a January 2018 Wells Fargo/Gallup Small Business Index survey, where small business owners registered their most optimistic outlook in 11 years. Lenders who said demand increased in late 2017 attributed the rise to growth-related factors such as working capital, plant and equipment spending, and mergers and acquisitions (M&A) activity. Those citing softer demand blamed the decrease on competition from other banks and nonbank lenders.
- Middle-market and larger companies may see lending standards loosen slightly, while smaller companies should expect those standards to remain relatively unchanged.
For lenders to firms with more than $50 million in revenue, 25% of loan officers said their bank's lending standards changed in late 2017. In contrast, only 10% of banks lending to firms with annual sales below $50 million said lending standards changed in the fourth quarter of 2017.
Of those loan executives who said their banks' lending standards for middle-market and larger borrowers changed in the fourth quarter, 73% said they eased rather than tightened. Of those who reported more relaxed lending standards, tougher competition from other banks or nonbank lenders was the consensus factor behind those changes.
Four out of 5 lenders to middle-market and larger firms said they expect standards to remain relatively unchanged in 2018. For banks lending to smaller borrowers, 9 out of 10 lenders shared that view. However, for borrowers with $50 million or more in revenue, those expecting rules to ease outnumbered those forecasting tighter standards by 3 to 1.
- Middle-market and larger companies may see less expensive credit, while smaller companies should expect terms to remain relatively unchanged.
Nearly two-thirds of loan officers said credit spreads—the difference between interest rates charged to borrowers and the bank's costs of funds—remained basically unchanged for middle-market and larger firms in late 2017. Of those lenders who reported changes, twice as many said that spreads were lower compared to those who said spreads were higher. Lower credit spreads mean lower overall borrowing costs.
For smaller firms, the survey showed no changes for nearly every type of loan term in late 2017. These included maximum sizes of credit lines and maximum lending periods for term loans and credit lines. Survey respondents also reported no major changes in credit line fees, credit spreads, premiums charged on higher-risk loans, loan covenants or collateral requirements.
In speaking to their outlook for credit terms, two-thirds of lenders said they expected credit spreads to remain unchanged. One-third of lenders said they expected credit spreads to decrease in 2018.
Implications for Small Business Borrowers
Banks often view small business borrowers as higher risks than middle-market or larger companies. While the January Fed survey of bank lending practices shows no signs of this bias disappearing in 2018, there is good news. First, banker attitudes to smaller businesses appear to be stable. Second, lenders will respond to competitive pressures to win the business of high-quality loan applicants.
To best position your small business in the current lending environment, take steps in these three areas:
- Improve your risk profile by getting your finances and credit in order for both yourself and your business. Check your credit reports and take care of any problems.
- Tell a good story about your prospects for repaying the debt. Prepare a detailed business plan that demonstrates your knowledge of the industry and your business's position in it. Explain how the loan will be used and how your business's strengths and your management experience support repayment.
- Take advantage of the competitive environment. Start with banks with which you already have a relationship through deposit accounts, but check out all your options. These include other banks and also nontraditional lenders like credit unions and online loan providers.
Maxime Rieman is Product Manager at ValuePenguin. Educating and assisting shoppers about financial products has been Rieman's focus, which led her to joining ValuePenguin, a consumer research and advice company based in New York. Previously, she was product marketing director at CoverWallet and launched the personal insurance team at NerdWallet.
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