If you're in the market for a small-business loan, here's some advice: Shop til you drop. Interest rates are down again. Lenders are still competing for small companies' business and have no plans to shut off the tap, a new U.S. Federal Reserve survey shows.

So, what's the hurry? After all, the Dow's breaking records again. The economy did better in the third quarter than most thought, helped by consumer spending, the Nov. 24 gross domestic product revision showed. Besides, small-business borrowers have had an edge over larger ones since the summer, when the emerging-markets crisis and the plunge in the Dow began to take their toll on banks.

Still, the November Fed survey also shows that many banks have again tightened lending conditions for larger businesses in recent weeks -- despite cuts in benchmark interest rates. That's a trend that has been in place for several months, with more banks saying that they tightened to bigger borrowers since September, when the central bank commissioned an extra survey to assess conditions during the fall financial panic. And the percentage of lenders tightening credit for small businesses -- though small -- has nearly tripled to 15% since then.

Moreover, the third quarter 3.9% GDP rise masks some disquieting signs. Net corporate profit fell 6.2% year-on-year and 1.8% in the third quarter, after rising 0.6% in the previous quarter. And new orders for durable goods fell 1.7% in October, after a 1.3% rise in September -- the first drop in the big-ticket investment figure since May. Industrial machinery orders were down 8.4% on the month.

This suggests that it's time to borrow, lest relations between businesses and lenders become a little less copacetic. In its quarterly survey of senior loan officers at 55 top U.S. banks, the Fed found that the early fall stock market swoon led 15% to "somewhat" tighten standards and terms to small businesses (companies with less than $50 million in revenue). That left 77% of respondents who said their lending to small companies was unchanged. The survey reflects conditions in early November and compares them with September.

"We are not expecting the bottom to fall out," says Richard Wright, chief credit officer at Hibernia Bank in Metairie, La., which made $1.7 billion in small-business loans in 1997. Hibernia hasn't changed any of its small-business standards over the past 90 days. "The rate outlook is pretty good right now and could conceivably get better," he says.

SHARP CONTRAST. The picture for middle-market and large businesses looks less cheerful: The share of banks reporting tighter credit conditions (37%) was the largest the survey has shown since 1990, with many raising risk premiums. U.S. branches of foreign banks -- which typically lend more to larger corporations than small companies -- showed an even more dramatic shift: Nearly two-thirds tightening their credit standards.

Why haven't small companies felt the same pinch? Bankers contend that for all the individual risk associated with small businesses, they aren't as vulnerable to global dislocations as big companies. And a portfolio of loans to small companies is a more diversified risk than the same amount lent to a few big companies. "Small-business customers aren't being hit by market turbulences in Asia," says Martha Hayes, director of small-business lending at First Union NB in Charlotte, N.C. What's more, she says, "There is diversity in industry, in type of collateral, and in geography."

Another reason for the trend: competition among banks and finance companies for the small-business market. In all, small-business lending has increased more than 20% -- to $186 billion -- since 1995. Some 236 banks make $100 million or more a year in small-business loans, according to the independent bank research firm Veribanc Inc. "It's a very highly profitable area," says Warren Heller, Veribanc's research director.

Not that small businesses have been immune from larger market conditions -- notably if they borrow for real estate. That's an area where banks have tightened the lending spigot in a big way. Nearly half of domestic and foreign respondents to the Fed survey restricted commercial real-estate standards in the past three months, many of them citing a disruption in the commercial mortgage-backed securities market.

Officials at some of the country's largest small-business lenders say there's no need to be alarmed. Even if the industry is more parsimonious toward property buyers, small business will continue to enjoy one of the strongest markets in recent history -- especially with three Fed rate cuts since Sept. 29. The total 0.75-percentage-point reduction has left the Federal funds target rate -- the U.S benchmark -- at 4.75%.

Optimism is still the watchword at Wells Fargo Bank, whose small-business loan portfolio has increased from $4.6 billion to $5.4 billion over the past year, making it the country's second-largest. "We've stayed very consistent at pricing and underwriting," says Mike James, who directs the bank's small-business lending. "There's been no real change."

At Fleet Financial Group Inc., with 400,000 small-business borrowers, group director Ralph Sillari also preaches consistency. "Moderate swings in the stock market or economy aren't going to have any material affect" on Fleet's credit standards. "This is a great time to get a loan."

That may be. But, if the U.S. economy does slow next year, as many small-business owners themselves expect, they won't be exempt from the effects. A recent survey of entrepreneurs by Arthur Andersen's Enterprise Group and National Small Business United showed that 58% expect a flat economy in the next 12 months and smaller profit gains in 1998 (3.5%) compared with last year (4.4%).

Veribanc's Heller cautions: "If the economy turns down, then all bets are off." In the meantime, small companies are holding a full house now, and they should play it.

By Dennis Berman in New York
dennis_berman@businessweek.com

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