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Halcyon Days for Small-Business Borrowers
Entrepreneurs can bag loans now at rates not seen since 1994

The bargains just keep on coming for borrowers. Average rates on small commercial loans punched under the 9% mark during the first quarter, says new data from the Federal Reserve, and midsized loans are going for just over 8%. That's the best deal in five years, a Business Week analysis shows.

The Fed's survey found that rates on the smallest loans -- those up to $99,000 -- dropped to 8.85%, compared with 9.16% in the prior quarter and down from 9.73% from the same period last year. The last time rates were this low was mid-1994, when small loans averaged 8.67%

For midsized loans of $100,000 up to $1 million, the story was much the same. The average rate fell to 8.06% from 8.26% in the fourth quarter and 8.82% a year earlier. The last time entrepreneurs got a better deal was also in 1994, when the average midsized loan went for 7.84%.

"NO CREDIT CRUNCH." The Fed's quarterly survey of business lending, conducted during the week of Feb. 1-5, closely parallels a February report from the National Federation of Independent Business. The trade group found that the average short-term rate paid by members it surveyed was 9.1%, down 0.20 percentage point from January. That compares with the 1995 high for this economic expansion of 10.6%, writes NFIB Chief Economist William Dunkelberg. "It remains clear that there is no 'credit crunch' for small business (nor was there one)," he wrote. "Only 3% identified credit costs and availability as their most important problem."

"We have lots of price-cutting from the banks," says Dunkelberg in an interview. He doesn't forsee any reversal of the Fed's rate-cutting with signs that the U.S. economy is peaking and concern that a cut would destabilize countries in economic trouble, like Brazil.

The slide in rates has been accompanied by a jump in the volume of small-business lending, which has been growing like gangbusters, says Warren Heller, research director at Veribanc, a Wakefield (Mass.) bank research and rating firm. He says he doesn't expect any significant change in lending conditions in the next six months, especially if Fed Chairman Alan Greenspan manages to engineer a soft landing for the economy.

JAPANESE BARGAINS. Branches of foreign-owned banks continued to be the low-cost pacesetters, offering an average of 7.85% on the smallest loans and 7.01% on midsized loans. That may reflect lending by Japanese banks, which are facing minuscule returns at home. Heller says they can earn much bigger margins here on small loans -- even while undercutting U.S. banks by as much as a full point.

The drop in small-loan rates continues a decline that began two years ago, marked by increasing competition among bankers for small-business loans and increasingly liberal terms. During March, for instance, fewer lenders were demanding prepayment penalties, and the average maturity -- the length of time before the loan rate was reset -- rose to 188 days for the smallest loans, compared with 165 days the previous quarter and 155 days a year ago. On loans of up to $1 million, the maturity rose to 191 days from 93 days a year earlier. (If maturity is your main concern, head for a small domestic bank, where the average stood at 291 days for the smallest loans and a more-than generous 447 days for midsized loans.)

Heller downplayed the lengthening maturity period, but he did say that it's a sign that "bankers are paying less attention to rate risk with rates this low." Not that you should shed any tears.

By Rick Green and Julia Lichtblau in New York



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