Fed Reports Improving Business Credit Environment

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Loan ProgramsThe Federal Reserve reports that banks are warming up to business loans. Banks are issuing commercial loans to businesses at the fastest rate since 2009.

The boost in commercial lending still hasn’t been fast enough for many business owners. Most banks self-reported that while they are lending more to businesses, more capital is flowing to large and medium-sized companies. Small businesses – those with 50 or fewer employees – are still dealing with a credit environment that is very much unfavorable to business financing.

Banks cut down on smaller business lending when the economy looks less favorable to businesses. Large and medium-sized companies are more likely to survive short-term business cycle declines whereas smaller businesses require larger capital injections and usually have less predictable income and cash flows.

Banks reported the strongest demand for commercial property loans. In general, banks are more willing to make loans for the purchase of real property because the loan is secured by collateral – the commercial property purchased with borrowed funds. Typically, commercial property loans are also variable rate lending vehicles, which isolates rate risk for banking institutions which are afraid to make fixed-rate loans during a period of abnormally low interest rates.

Commercial property loans are also known as asset-backed loans as any lien on the financed property is held by the bank. Since the start of the Great Recession, the commercial real estate market went into a similar downward spiral as the residential property market following the 2007 housing bubble burst. Going forward, industry experts expect that commercial property prices will stabilize, encouraging more business lending from banks.

Little more than one-fourth of respondents cited the improving economic fundamentals in their decisions. Instead, most see that individual firms are better suited to handle hardships and that lending to small business is not solely on the basis of an improving economy.

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