The banks continue to tighten, the traditional channels are tougher to navigate in the commercial lending space.
And against a backdrop where smaller firms are still seeking credit as we enter the second month of the year, that gives renewed opportunity for alternative providers and the private credit markets.
As noted in the Federal Reserve’s January survey of senior loan officers at banks, and with a qualitative take on business lending, the lenders “reported tighter standards and weaker demand for commercial and industrial (C&I) loans to firms of all sizes over the fourth quarter.” Banks also reported having tightened most queried terms on C&I loans to firms of all sizes over the fourth quarter. Respondents said that there were higher premiums charged on the cost of funds, on credit lines and they also reported more stringent collateralization requirements.
The reasons for the tougher loan terms? Macro uncertainty and some concerns about their own liquidity positions.
As those loan parameters grew a bit more onerous, the lenders showed evidence that “significant net shares of banks reported weaker demand for loans from firms of all sizes. Furthermore, a significant net share of banks reported a decrease in the number of inquiries from potential borrowers regarding the availability and terms of new credit lines or increases in existing lines.”
As PYMNTS Intelligence data noted at the end of last year, and as reported here, smaller firms may seem to be at a crossroads in accessing and tapping credit. We found headed into the final months of the year that nearly 34% of small to medium-sized businesses (SMBs) do not use credit but want to start doing. Over half of SMBs said they anticipated using corporate cards into the middle of 2024, surpassing business loans from online lenders (22%) or working capital loans from banks (21%).
We also found that, in research conducted with U.S. Bank, that a third of SMBs prefer borrowing tools with more favorable terms. Many SMBs said that accessibility of funds remained more important than relationships or trust, which implies that there’s some leeway for digital upstarts to capture market share against the incumbent lenders. Only 43% of respondents said that trust and relationship factors were important, which leaves a majority of smaller firms seemingly ready to compare loan terms and make the switch to other lending channels.
Those channels would include the large hedge funds and private equity vehicles such as BlackRock and Apollo Global Management. Banks, too, have been partnering with investment managers to offer private credit options, as shown in this announcement by Citi and LuminArx creating Cinergy.