Loan Terms For Business Get Stiffer, Fed Reports

WASHINGTON - Despite continued sluggishness in business loan demand, banks made their loan terms more stringent in recent months, the Federal Reserve Board said Wednesday.

In its latest survey of banks' lending practices, covering mid-August through mid-October, the Fed found that bankers generally did not make it harder to qualify for business credit.

But a growing number of institutions were limiting the size of credit lines, assessing higher loan fees, demanding wider spreads, and imposing stricter convenants and collateral requirements on business borrowers.

Senior Officers Were Quizzed

The findings raise new doubts about the banking industry's willingness or ability to help U.S. business borrow their way back to growth.

The Fed asked senior loan officers at 60 large banks to compare business conditions over the two-month period.

Two-fifths of the lenders reported demand for business loans by middle-market firms had weakened since August. More than a quarter reported small-business demand had declined as well.

"Businesses can't meet the terms, even if they're dealing with a relatively healthy bank," said William K. MacReynolds, director of financial affairs, U.S. Chamber of Commerce. "And if you're dealing with a bank that's in trouble, there's no way that most small businesses can get new loans."

Belt-Tightening Side Effects

"Everything is going in one direction, and that's down," Mr. MacReynolds said. "I don't think the Fed recognizes the severity of the situation."

The Fed, however, used a footnote in its report to cast the data in a positive light: Given that banks are more inclined to admit to strictness than leniency, "the virtual absence of reported tightening of standards . . . might be interpreted as indicating that standards actually have been eased."

The largest business borrowers saw the biggest hike in costs.

Among banks that lend to middle-market companies - with annual sales of $50 million to $250 million - 32% said their spreads on loans had widened since August; 31% said they imposed stricter covenants, and 25% required more collateral.

Higher costs for credit lines were imposed by 27%, and 19% granted smaller lines.

Large firms fared worse: 26% of their bankers wanted wider spreads on loans to these companies, 29% levied higher fees, 28% granted smaller credit lines, 14% demanded more collateral, and 12% imposed stricter covenants.

Small businesses, on the other hand, were less affected: 16% of banks tightened loan covenants and 15% hiked collateral requirements for small firms.

Twelve percent boosted credit line costs and spreads. But none reported reining in the maximum size of credit lines.

Credit Cost Getting Lower

While the spreads are widening, some small businesses are not bothered, said William C. Dunkelberg, chief economist of the National Federation of Independent Business.

"The percentage of our members who are borrowing on a regular basis has hit a record low - 33%," Mr. Dunkelberg said. And for those that want funds to expand, "the overall cost of credit is falling, and that's not bad."

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