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Regional Matters

May 23, 2023

Is There a Credit Crunch? A View From Fifth District Businesses

Rising interest rates and a few bank failures have intensified discussions about tightening credit in the United States and what that might do to businesses' ability to borrow and invest. The Senior Loan Officer Opinion Survey (SLOOS) released by the Federal Reserve Board of Governors indicated that tighter loan standards were evident across loan types and firm sizes, including for commercial and industrial (C&I) loans. In May, we used our Fifth District manufacturing and service sector surveys to collect more information on the demand side of the borrowing equation by asking the extent to which firms are finding it more difficult to obtain credit. In the end, firms reported that credit was either more difficult to obtain or unchanged from last year. However, it is also true that most firms in our sample did not seek credit in the last three months, nor do they intend to seek credit in the remainder of the year — primarily not because of more stringent lending standards but because they do not need the credit to run (or expand) their business.

To Apply or Not Apply: Either Way, Credit Seems Tight

Most firms in our sample did not try to apply for new credit (e.g., a loan or line of credit) in the past three months. In fact, of the 218 firms that responded, only a little more than one fifth of firms recently applied for new credit. This did not vary noticeably by industry or size of the firm — small firms (firms with fewer than 500 employees) were only slightly more likely to apply for credit than large firms, and manufacturers were only slightly more likely to apply for credit than service providers. This is consistent with the SLOOS results, where most major net shares of banks (particularly the mid-sized or smaller banks) reported weaker demand for C&I and commercial real estate loans from firms of all sizes. In the March Small Business Economic Trends report from the National Federation of Independent Businesses (NFIB), 60 percent of small business respondents said that they were not interested in getting a loan. Among those businesses that did try to borrow, the NFIB respondents reported that it was more difficult to get a loan than it was in prior months, and they had to pay a higher rate than in February.

Fifth District firms, too, reported that obtaining credit was more difficult. Of the firms that did apply for new credit, almost 60 percent reported that obtaining that credit was either somewhat or much more difficult (another 37 percent reported that it remained the same). We also asked those who did not apply for new credit whether credit was harder to get than one year ago: About 30 percent said it was somewhat or much more difficult to obtain. Not surprisingly, for those who did not apply, about one-third reported that they were unsure of how difficult it was to obtain credit (another 37 percent reported that credit access was about the same as a year ago.)

When asked why credit had become more difficult to obtain, almost all respondents noted that lending standards had become more stringent. There were also comments about banks simply not wanting to lend. Some comments included, "Lenders are unclear on whether they want or should make loans," "Lenders are increasing reserves and reducing lending," and "Banks are becoming too conservative."

For those firms who did receive loans, most of them sought the credit to expand their business, pursue a new opportunity, or acquire business assets. In addition, those who sought credit generally received what they requested: Almost three quarters of those who applied received at least 75 percent of the amount requested.

Will Firms Seek More Credit This Year?

Overall, compared to the last three months, fewer firms are planning to apply for credit sometime in 2023. In total, about 30 percent of the 218 respondents either applied for credit in the last three months or plan to apply in the remainder of this year.

When asked why they were planning to apply for new credit, the most common response was, again, to expand their business, pursue a new opportunity, or acquire business assets. A secondary reason was repairing or replacing capital.

Despite the reports of tightening credit mentioned above, this was not the primary reason why firms chose not to apply for credit: For those firms, the most common reason was that they simply had no need for new credit. Some respondents commented that they are still taking advantage of COVID-19 grants or already have funding for capital expansion at more attractive rates. Others reported that they simply do not go into debt or that they finance growth through their own profits.

What's Next?

There can be little doubt that tightening credit, as reported by firms in multiple surveys in the last few months, is connected to rising interest rates and increased uncertainty in the financial sector. However, most firms in our sample are not seeking credit and do not plan to seek credit in the remainder of this year — a reality seemingly unconnected to tightening credit. Nonetheless, as we move though the next 12 months, tightening in financial markets could create a challenging environment for Fifth District firms — something the Richmond Fed will continue to monitor closely.

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Joseph Mengedoth (804) 762-2285