Banks are clamoring to lend to the most creditworthy small businesses, even as credit availability remains broadly limited.

The competition for the best small-business customers is "alive and well," Lynetta Steed, executive vice president and division head of the business and community banking division at Regions Financial (RF), told American Banker on Tuesday.

"When it's a good loan ... the small business owner is very savvy. They know they are in demand and they are really making a bank work for their business," Steed said in an interview at a small-business lending conference in Washington, D.C.

That trend is similar to what many banks are seeing in their consumer lending businesses. Small business credit has grown somewhat this year, but still remains tighter than before the financial crisis. As the economic recovery remains sluggish and lenders remain wary of extending credit to riskier borrowers, banks are increasingly competing with each other to lend to the most affluent, and seemingly safest, customers.

Steed acknowledges that such competition for the best customers comes at a cost.

"You're having to be creative on pricing. You think you've got a beautiful offer and you'll have a competitor bank come in there and undercut with a crazy rate," she says. "It's a lot harder to keep all those good customers, because they are definitely using the competition to get the best deal."

But Regions is competing for those small-business customers for good reason, Steed adds.

The most attractive small businesses have "the capital, the cash flow, the ability to repay and sufficient collateral," she says. "We're looking at risk and when we feel there's a good risk for that customer, we're aggressively trying to do that."

Other banks, particularly the larger institutions, are also finding the competition stiff, according to Steve Bartlett, chief executive of the Financial Services Roundtable trade group.

"Anecdotally, bankers in the small-business space tell me they typically find themselves competing with six banks for a loan," Bartlett told American Banker in an interview at the conference.

"I think it's increasing because banks, especially the large banks, are putting a lot of resources and focus on increasing their small-business portfolio," he says. "A lot of that is because as the economy picks up, banks want to be sure they are there for the good times when the economy is strong again, and they need that foundation with the businesses now."

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