A smaller share of banks is tightening lending standards than were doing so in the fourth quarter of 2008. And every quarter since then has shown a declining share of banks tightening standards. However, by pre-recession standards, banks' small business lending standards are tight.
Below is a chart drawn from the results of the Federal Reserve's Board's Senior Loan Officer Opinion Survey, which shows the percent of loan officers for small firm commercial and industrial loans who said that lending standards were loosened minus the percentage that said they were tightened. As you can see, pattern degree of tightening has moderated over the past three quarters. In fact, in the last quarter, one of the 53 loan officers surveyed actually said that lending standards has loosened.
But the level of tightening remains much higher than it was in the pre-recession period. In fact, back in the fourth quarter of 2006, there were more banks loosening credit standards that tightening them. And we are probably a long way from seeing that happen again.
So what does this pattern of credit tightening mean for small business owners? They should probably think in terms of other methods of financing their operations than borrowing from banks. Unless small businesses have stellar credit, the tightening of standards will likely adversely affect their efforts to borrow from banks.
More importantly, we don't know how long this period of tightening standards will last. It may be a long time before we return to looser lending standards for small businesses, if we return to them at all.
Image: Percentage of Senior Loan Officers Saying Lending Standards are Loosening Minus the Percentage that say Tightening.
Source: Federal Reserve Board Senior Loan Officer Opinion Survey on Bank Lending Practices
****About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America; Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs; and From Ice Cream to the Internet: Using Franchising to Drive the Growth and Profits of Your Company.