Banks are finally loosening loan terms to small businesses, but companies of all sizes have recently slowed demand for credit amid a still-sluggish economy.
The Federal Reserve's latest survey of loan officers showed a net 23% of banks eased lending standards early this year, the most since 2005 and up sharply from a net 7.7% at the end of 2012.
The improvement was also steeper than the one seen for middle-market and large firms, defined as those with annual sales of $50 million or more.
But demand for bank loans has softened. The Fed survey found that a net 7.7% of loan officers saw higher credit demand from small businesses. Just 5.8% saw more demand from bigger firms.
That's down from net positives of 15.3% and 19.1%, respectively, late last year and 21.8% and 31% a year earlier.
Across all businesses, the most common reasons for the tepid demand was less investment and reduced financing needs for inventory and accounts receivables.
Responses from the loan officers are in line with what small firms are saying. The share of business owners reporting credit was hard to come by fell in March to the lowest since 2006, the National Federation of Independent Business said.
Small businesses tend to create most new jobs, but plans to hire fell to a year low, with no growth in staff seen. Their economic outlook remained dismal, sales views turned negative, inventories were shrinking, and capital spending plans were little changed.
"We have such a horrible view of the future," said NFIB chief economist William Dunkelberg. "Why would I borrow money?
A solid majority of firms have consistently shown no interest in borrowing for years, though small manufacturers and construction companies are faring better now in the weak recovery, he added.
Dunkelberg also said the Fed doesn't poll the small community banks that lack the access to cheap capital that the biggest lenders use to make profits.
While lending standards at community banks have eased since the financial crash's immediate aftermath, they haven't changed much recently. Small lenders also are seeing little demand.
"There's just no growth in the small business part of the economy," Dunkelberg said.
Lending is still improving gradually, and data from the Federal Deposit Insurance Corporation show the total small business loans outstanding grew in Q4 for the first time since 2008. The uptick to nearly $586 billion from $584 billion came as commercial and industrial lending offset an ongoing slide in real estate loans.
Overall commercial lending totaled $2.58 trillion, surpassing its prior high after starting a turnaround two years sooner.