The Current State of Business Lending — and 5 Trends to Watch What small businesses need to know about the current business lending landscape and the changes that are on the way.

Business owners need access to capital, especially when trying to start or grow their small businesses. A loan can carry you through tight months financially or help you expand your current business operations.

Supply chain issues, ongoing inflation and the threat of a recession have led to tighter economic conditions in 2023. This economic landscape has made it more difficult for small businesses to access funding.

A Federal Reserve study found that demand for commercial and industrial (C&I) loans dropped during the first quarter of 2023. According to the Small Business Lending Index, small business loan approvals at large banks fell from 13.2% in August to 13.1% in September.

As your small business continues to face challenges in the marketplace, it's a good idea to understand the current economic environment and what changes are on the way. Knowing the upcoming trends in small business lending will make it easier for you to find the financing you need.

Related: How to Access Capital in an Economic Downturn

5 business lending trends to watch

Understanding the current business loan market is the best way for business owners to anticipate their ability to access financing. If you're getting ready to apply for a business loan, here are five business lending trends to watch out for.

Potential for recession

According to the traditional definition, the U.S. isn't currently in a recession, but there's still a possibility we'll see one in the coming year. Job growth has remained strong, and inflation is easing up, but The New York Fed recession probability indicator found that there's still a 66% chance of a recession in the next 12 months.

Tightened lending standards

Banks began tightening their lending standards at the end of 2022. Banks have had a harder time getting new deposits, and when they do, they have to pay higher interest rates due to the ongoing Fed rate hikes.

The collapse of Silicon Valley Bank, Signature Bank and First Republic Bank only exacerbated these challenges. Due to the liquidity risk, many banks simply can't afford to offer new loans to businesses.

Rising interest rates

Not only are small business loans more challenging to qualify for, but they're more expensive if you do qualify. Your rates can vary substantially depending on your credit score, the financial strength of your business and the structure of your financing.

If you plan on applying for an SBA loan, you can expect to pay an average interest rate of 7.180% for a 20-year loan. In comparison, the average interest rate was 2.765% in October 2021.

Changes to the SBA loan program

If you've ever tried to apply for an SBA loan, you likely found the process tedious and unnecessarily prohibitive. However, the SBA recently announced changes to its loan program in an effort to streamline the application process. These changes expanded the types of lenders the SBA will accept and relaxed many of its regulations.

As of August 1, it's easier for non-bank lenders to issue SBA loans, potentially giving more small businesses access to low-cost credit. This could provide much-needed help to businesses struggling with supply chain issues and inflation costs.

However, these changes do face strong opposition, and members of Congress are trying to disallow the SBA from adding new fintech lenders. Some have suggested that by relaxing its regulations, the SBA will cause more loan defaults over the coming years.

Relationship-based lending is key

Given the tightening lending standards and reduced access to credit, businesses can gain a competitive advantage by focusing on relationship-based lending. By showing that you're committed to building a long-term relationship with one particular lender, you may receive access to personalized solutions and loan programs that you may not have access to otherwise.

Related: Why Venture-Backed Startups Are Losing Speed — and Creative Ways to Earn Funding in Challenging Economic Times

How to access business capital

Small businesses should continue to plan for economic challenges in the coming year. High interest rates and reduced real estate equity may limit access to small business funding. So, if you want to qualify for a business loan, you'll need to think outside the box.

You may find the easiest route is to consider alternative lenders and alternative sources of financing. The Biz2Credit survey found that while loan approvals fell with large and small banks, they actually increased with non-bank lenders.

In September 2022, your odds of approval with a non-bank lender were 27.5%, and in September 2023, that number rose to 29.7%. You're more than twice as likely to get approved for a business loan from a non-bank lender than from a large bank.

Non-bank lenders include online lenders and financial institutions that offer loans outside of the traditional banking system. When you go this route, you'll receive an easy, streamlined application process. Since the credit and application requirements are less stringent, you'll typically receive much faster access to capital.

While the current economic landscape poses significant challenges, by understanding and staying on top of business lending trends and exploring alternative sources of financing, small business owners can increase their chances of securing the funding they need to grow their businesses.

Related: Why Small Businesses Should Look for Alternative Capital Financing