Is your lender turning into a soft touch? You have to wonder, based on data from the most recent Federal Reserve survey of senior loan officers released earlier this week. The quarterly report conducted this month found that bankers were slashing their own profit margins in attempts to attract borrowers, with the most aggressive cuts coming in small-business loans.

Citing heavy competition, a surprising 30% of domestic bankers told the Fed they had cut their "spread" -- the difference between their cost of obtaining money and the interest rate they charged to borrowers -- on loans to small companies. By contrast, half that many said they eased terms to big and midsize companies. What's more, a small minority of banks said they continued to loosen standards for commercial and industrial loans to small companies, something they're not doing for large and midsize borrowers.

As for specific terms of business loans, the bankers showed a slight bias toward loosening in several key areas, including maximum loan size, cost of credit lines, and loan covenants. The main motivation cited was competition, with bankers giving it a rating of 2.3 for importance on a scale of 1 to 3.

Need a commercial real estate loan? You'll probably get a good deal, though your banker is loath to admit it. Relatively few respondents -- 10.7% -- confessed to easing terms for borrowers. But an astounding 83.9% said their rivals had eased terms "somewhat" or "considerably."

The latter figure is probably closer to the truth, says Warren Heller, research director at Veribanc, a bank consulting firm in Woburn, Mass. Heller says about half of all banks offer terms that are easier than they were five years ago, and competition is so fierce that bankers are privately asking each other, "How can the other guy back this loan?"

Of course, he adds, that's not a problem if you're the borrower. "If you had any questions about being able to qualify for a loan," Heller says, "now's the time to go for it."

In fact, a July survey of National Federation of Independent Business members who went shopping for a loan found that only a net 1% said it was harder to get approval than last time -- the lowest figure since 1980.

One possible reason for the generous mood: weakening demand for loans. The Fed figures suggest that you'll have less competition at your bank right now because demand is shrinking from bigger companies and leveling off among small ones after an 18-month surge.

While the report didn't give specific figures on loan demand, a separate survey released earlier this month by PricewaterhouseCoopers, the accounting giant, found that only 26% of fast-growing smaller companies sought to borrow in the first quarter, compared with 31% a year earlier. The survey found small companies are enjoying fat profit margins and have been weaning themselves off bank loans in favor of self-financing.

If you do apply for a loan, the PWC report says you should be able to get a better rate. The handful of companies that negotiated new deals cut their interest rate to an average 8.98% -- 33 basis points below the benchmark for the entire survey group of 446 high-growth companies.

Just knowing that banks are in such a weak position can strengthen your hand, says Pete Collins, director of entrepreneurial advisory services at PWC. "It alerts the business owner to the fact that negotiations are possible," Collins says. "Before, they have had to take the terms the bank would give."

Still, be prepared to play hardball, says William C. Dunkelberg, the NFIB's chief economist. "Have another deal in your back pocket and then threaten," he says, noting that some banks will lower rates on your existing loans if they think you'll leave. At the very least, they'll have to consider your offer. After all, with demand waning and prices falling, it's a buyer's market.

By Rick Green in New York
rick_green@businessweek.com

To: FINANCE