Small Business Demand for Loans on the Rise

January 31, 2012

According to the Federal Reserve Bank’s (Fed) January 2012 Senior Loan Officer Opinion Survey on Bank Lending Practices, small-business loan demand increased to its highest level since 2005. The Fed surveyed 56 large domestic banks and 26 U.S. branches and agencies of foreign banks, and asked senior loan officers a series of questions regarding the changes in the supply and demand for bank loans to household and businesses over the previous three months.

Of those surveyed, approximately 15 percent of domestic banks reported an increased demand for loans from small firms. For purposes of this survey, small firms are defined as those firms with less than $50 million in annual sales. This increase in demand is the largest percentage increase reported since 2005.

The results of this survey–in line with the NSBA 2011 Year-End Economic Report released today–seem to indicate an economy on the mend. Those surveyed also reported an increased number of inquiries from potential business borrowers concerning new or increased lines of credit.

Unfortunately, concurrent with this increase in demand, the Fed report shows that lending tightened slightly in the fourth quarter of 2011. While the majority report lending standards for small firms remained unchanged (93.5 percent) 3.8 percent reported tightening standards while only 1.9 percent reported easing lending terms on small businesses. The size of credit lines remained essentially unchanged with 3.8 percent reporting both increased and decreased credit lines and 92.5 percent reporting no change at all.

In 2011, GDP grew at a rate of 0.4 percent in the first quarter, 1.3 percent in the second quarter, 1.8 percent in the third quarter, and 2.8 percent in the fourth quarter, further evidencing that the economy is moving in the right direction. On Jan. 24, a Gallup poll reported that its economic confidence index was at its highest level since May of last year. The results of this survey, coupled with additional data, appear to support the notion of an economy headed in the right direction.

Please click here to view the full report from the Fed.