Fisher Investments Editorial Staff
Interest Rates, US Economy

Winter Credit Thaw

By, 12/31/2010
Story Highlights
  • In a sign smaller to medium-sized businesses are moving toward growth mode, US banks are beginning to increase lending as loan demand from businesses rises.
  • Q4 marks the sixth consecutive quarter of US GDP growth, and many firms are more confident and seem ready to avail themselves of low interest rates and thawing underwriting standards.

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Though it may be difficult for snow-bound readers on the East Coast to envision anything thawing, a thaw does appear to be on the way—in lending to smaller US businesses.

Over the past 18 months or so, as the economy and credit markets have recovered, lending to smaller businesses has lagged. Indeed, banks have frequently been vilified by anyone standing in front of a microphone (they're easy targets after all) for not lending to smaller and medium-sized businesses. However, in a sign these businesses are moving toward growth mode, US banks are beginning to increase lending to smaller businesses as demand for loans rise. In the past two months, the amount of commercial and industrial loans (C&I) held by banks has crept upward—C&I lending was up 0.7% in October and 2.3% in November. In fact, Q4 C&I lending grew 0.2% from Q3 to $1.22 trillion. That's the first quarterly increase in over two years. And C&I lending is predicted to grow 3% in 2011.

For smaller businesses looking to grow, borrowing now makes sense. Interest rates are at historic lows and bank underwriting standards have been loosening for several months. The cost of a C&I loan for moderate-risk borrowers for terms longer than one year is 4.64%—and short-term loans are even cheaper. As of September 30th, US firms tapped 35.05% of available credit—that‘s below the 42.52% peak of two years ago, but it's an increase and a positive sign nonetheless.

And though politicians and pundits excoriated banks to lend, lend, lend, something little discussed is smaller businesses haven't exactly been banging down the banks' doors demanding credit. Yes, banks were risk averse—forced to recapitalize in a challenging environment facing the uncertainty of ever-changing financial regulations. But remember, banks do indeed want to lend—it's profitable for them. It's just tough to lend to those who don't want it. Since 2008's financial crisis, many firms were understandably deleveraging. That appears to be changing now. 

Easier underwriting and cheap rates are tipping the scales for many businesses. But so too is the ongoing recovery. With Q4 likely making six consecutive quarters of US GDP growth, many firms are more confident and seem ready to avail themselves of readier credit—no doubt many firms are now thinking less in terms of "hunker down" and more of "opportunity cost." Naturally, the thaw isn't across the board, but it's a thaw nonetheless—and an encouraging sign for both credit markets and the broader US economy.

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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