Banks Ease Lending Standards for Small Businesses

Aug 30th, 2010 @ 5:11 AM by Debbie Dragon

According to a Federal Reserve survey, banks have started to ease lending standards for small businesses. Since 2006 lending practices have made it very difficult for small businesses across the country to get loans. Many economists believe that this has been detrimental to our economy’s financial recovery. While large businesses have already been finding easier criteria to receive business loans for the first time in over three years, banks are finally easing standards for small businesses as well. A small business is defined as one that has sales of $50 million or less, according to the federal reserve.

“After three years of tightening credit conditions, this is the first real sign that banks are feeling more comfortable and are starting to ease lending standards,” said Mark Zandi, chief economist at Moody’s Analytics. “Credit conditions are still incredibly tight, but at least they are easing a bit.”

Economists see this as a first step in an upward battle to economic recovery. “At least lenders aren’t panicking anymore,” said David Wyss, chief economist at Standard & Poor’s in New York. “This gradual improvement is important for the economy because small businesses tend to be big job creators.”

The Federal Reserve’s data is based on a survey done in July, and it found that small businesses in areas where there was lending competition were the ones seeing the most improvement. The survey also found that mainly larger banks are the ones easing loan standards. The same survey also showed that a few banks are also easing lending for some types of consumer loans, including credit cards.

The increase in lending may be in response to the Federal Reserve meeting last month that looked at tight lending issues for small businesses. The economic crisis had nearly halted small business loans. This was troubling to many economists who believe that small businesses could drive the economic recovery. Small businesses tend to be large contributors to new job creation and are responsible for 50% or more of new jobs. Since the conference there has been increased pressure placed on banks to offer lending to small businesses.

At the conference Federal Reserve chairman Ben Bernanke emphasized how important it was for banking regulators to put pressure on banks to open up lending to small businesses. He said, “making credit accessible to sound small businesses is crucial to our economic recovery.”