Small Business Lending Tightens as Regional Banks Pull Back

For twenty-three years, Maria Sandoval's family restaurant in Cedar Falls has banked with the same institution — a regional lender with six branches, a loan officer who knew her by name, and a handshake-and-a-balance-sheet approach to credit that kept the business running through recessions, a pandemic, and a kitchen fire. Last month, that bank told her it was no longer making new small-business loans of any kind.

Sandoval's experience is becoming common across the country as regional and community banks — historically the backbone of small-business lending — pull back sharply from the market. Battered by losses on commercial real estate, stung by deposit flight to higher-yielding alternatives, and under pressure from examiners to shore up their capital, these institutions are quietly retreating from the lending that Main Street depends on.

The numbers are stark. Data compiled by The Ledger from regulatory filings show that outstanding small-business loans at banks with between $10 billion and $100 billion in assets fell 9.4% in the twelve months through March — the steepest decline since the aftermath of the 2008 financial crisis. The pullback is concentrated in exactly the kinds of loans that small businesses need most: lines of credit, equipment financing, and working-capital facilities under $500,000.

"The regional banks are in survival mode," said Franklin Osei, a banking analyst at Ridgepoint Capital. "They are sitting on commercial real estate portfolios that are worth less than they are carrying them for, and they have lost a chunk of their deposit base to money-market funds. The last thing they want right now is to add more risk to their books, and small-business loans — unsecured, labour-intensive to underwrite, and hard to sell — are the first thing to go."

The impact on Main Street is immediate and tangible. In Dayton, Ohio, a general contractor named Jerome Hadley told The Ledger he was turned down by three banks in six weeks when he tried to finance the purchase of a backhoe needed for a municipal water project he had already won. He eventually leased the equipment at nearly double the cost. In Baton Rouge, a dry-cleaning chain owned by Patricia Nguyen was denied a renewal on a $200,000 revolving credit line she had held, unblemished, for eleven years. "They said the decision had nothing to do with my business," Nguyen recalled. "They said they were reducing their exposure to the category. I am not a category. I am a customer."

Large national banks have not filled the gap. While they have the capital, they have historically shown little appetite for the kind of relationship-intensive, small-dollar lending that community banks specialise in. The economics are unattractive: underwriting a $150,000 loan to a local retailer costs nearly as much as underwriting a $15 million facility for a mid-market corporation, but generates a fraction of the revenue. Fintech lenders have moved in aggressively, but their rates — often two to three times what a bank would charge — are prohibitive for many borrowers. "The fintechs are filling the gap the way a payday lender fills the gap for consumers," Osei said. "They are there, but the price is punishing."

The Small Business Administration has attempted to ease the strain by expanding its guaranteed-lending programmes, and the agency reported a 12% increase in loan approvals in the most recent quarter. But SBA loans involve extensive paperwork, processing times that can stretch to months, and eligibility requirements that exclude many of the businesses most in need. For a restaurant owner who needs $80,000 before the summer season or a roofer who needs a truck by next Tuesday, the federal programme is too slow to matter.

Economists warn that a prolonged contraction in small-business credit could have consequences that extend well beyond the businesses directly affected. Small firms account for roughly 44% of private-sector employment and have historically been responsible for the majority of net new job creation. When they cannot access credit, they do not expand, do not hire, and in some cases do not survive. "This is how a financial-sector problem becomes a real-economy problem," said Lucia Fernandez, an economist at the Brookfield Institute. "It does not happen with a bang. It happens one denied loan application at a time."

Back in Cedar Falls, Sandoval is still looking for a new lender. She has applied to two larger banks and an online platform, and is waiting to hear back. In the meantime, she has postponed a planned renovation and cut back on catering orders. "I have been through hard times before," she said. "But this is the first time the problem was not my business. The problem is that the bank that always said yes just stopped saying anything at all."