The disparity between what businesses pay for small loans and what they pay for really small loans is getting wider, according to a recent Federal Reserve study.

Interest rates for bank commercial loans of less than $100,000 are historically high compared with rates for loans of $100,000 to $1 million, the study of call report data from late October found.

The widening differential is a byproduct of the changing small-business loan market. Technology is allowing lenders to better manage risks in the niche, even as they lend further and further downmarket.

In 1989, according to the Fed study, the average rate paid on a loan of less than $100,000 was 12.53%, just 51 basis points more than on loans of $100,000 to $1 million.

But the most recent data showed that small businesses paid 9.6% on average for loans of less than $100,000, 85 basis points more than for the bigger loans.

Bankers say the difference has gotten wider because they are lending to a wider class of small entrepreneurs and are more accurately pricing the loans to reflect the risks.

"As you lend deeper into the market and pick up smaller customers, you should see higher rates," said Dev Strischek, executive vice president of credit policy for the Palm Beach, Fla., region of Barnett Banks Inc. "The rates are higher because we expect some losses."

"In the olden days, banks wouldn't lend to these businesses at all," said William Dunkelberg, chief economist for the National Federation of Independent Businesses. "Now they just price the loan according to the risk they take on."

But bankers say a dramatic shift in the market caused by increased competitive pressures and use of new tools like credit scoring is changing the pricing dynamic for small-business loans.

Marilyn Daahl, vice president of Norwest Bank Minnesota, said the spread between prime and rates on the smallest commercial loans has been high because banks have not fully determined how to reduce the internal costs associated with the niche.

Though Ms. Daahl said that the smallest loans are a profitable opportunity for lenders, she nonetheless predicts spreads on those loans will decrease in the next few years as more banks use credit scoring and centralized underwriting to streamline their lending procedures.

Competitive pressures will force banks to pass their savings along to the borrowers and lower the interest rates they charge for small-business loans, she said.

Fed economist William Nelson said all businesses paid higher rates during the recession of 1991, but increased competition caused rates for big commercial loans to decline after the economy recovered.

"Banks will lose those loans to the capital markets if they don't offer competitive rates, whereas they don't have that problem with small loans," Mr. Nelson said.

One of the biggest small-business lenders, Wells Fargo & Co., San Francisco, uses a proprietary credit-scoring system and offers business credit lines nationwide through direct mail.

Scoring lets Wells make a lot of quite small loans to businesses; its small-business average is just $18,242. And Wells' rates on small-business loans vary enormously, from 0.75% above prime to 8.75% above prime last late last month.

But credit scoring may be unreliable for deciding how to price small- business loans, Mr. Nelson said.

Two-thirds of respondents in a November Fed study, "Senior Loan Officer Opinion Survey on Bank Lending Practices," said their credit- scoring models failed to predict loan quality problems in their credit card portfolios, he noted.

Nevertheless, Norwest's Ms. Daahl said lending to small-business owners is less risky than lending to large corporations, because the risk is distributed among a bigger pool of borrowers.

"If these customers can handle their personal finances, we believe they will be able to handle their business finances," she said."We don't see more of a risk in that market segment."

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