Small Business Lending Trends: Navigating a Rocky Road Ahead
Highlights:
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Despite recent monthly gains in small business lending, the overall year-to-date picture remains muted as firms contend with thinner profit margins, increased vulnerability to economic shocks, and rising input costs driven by trade policy.
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An economic rebound is anticipated by the first quarter of 2026, and falling Federal Reserve interest rates are expected to lower borrowing costs, creating a strategic window for well-positioned small businesses to secure financing and plan for growth in late 2025 and early 2026.
As 2025 winds down, small businesses across the U.S. are navigating a lending landscape defined by uncertainty. After months of economic strain, trade pressures, and thinner margins, many owners are being forced to make tough choices. Still, with recent signs of lending growth, lower interest rates, and an expected economic rebound in early 2026, relief for Main Street may finally be on the horizon.1
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What the Numbers Tell Us
Recently, lending to small businesses picked up: In September, small business lending was up 6.4% compared to August and up 7.4% year-over-year. However, the index remains down 4.8% for the year to date, meaning that although month-to-month conditions improved, the longer-term picture is still muted.
In terms of credit health, delinquencies of 91–180 days haven’t changed much, but delinquencies of 31–90 days and defaults each fell slightly — by four basis points and two basis points, respectively. On the labor front, official government data remains delayed due to the recent government shutdown, but private-sector data suggests that the labor market rebounded modestly in October after a dip in September. Nevertheless, job growth at small businesses is showing strain; over the last three months, firms with fewer than 500 employees shed about 140,000 jobs.
Meanwhile, the Federal Reserve has cut interest rates by 25 basis points and markets project another rate cut in December. Those rate drops could help improve the lending climate for small firms by lowering borrowing costs and encouraging renewed investment.
Why Margins and Shocks Really Matter
Smaller margins mean small businesses are more vulnerable to shocks. When profit margins shrink, a single unexpected event — such as a spike in supply costs or a drop in demand — can have an outsized impact. With less financial cushion, many owners find it difficult to absorb additional costs without cutting staff or scaling back operations. As a result, thinner margins often translate into difficult decisions about layoffs or postponed expansion plans.
Trade Pressure Hitting Main Street
Trade policy changes are now hitting small business operations in tangible ways. Surveys show that a majority of small business owners are reporting higher costs because of trade policy, many are less profitable, and some are seeing revenues fall. These added expenses and revenue declines cut into the financial cushion businesses rely on. When costs rise and demand falls, the lending environment becomes riskier for both lenders and borrowers, creating a feedback loop that makes credit harder to access just when it’s needed most.
When Might Relief Arrive?
There is some light at the end of the tunnel. Economists expect the current GDP decline to resolve by the first quarter of 2026, setting the stage for a rebound. The recent 43-day government shutdown — the longest in U.S. history — is expected to shave about 1.5 percentage points from fourth-quarter growth, but much of that lost momentum should recover across 2026. As the economy stabilizes, small businesses may feel more confident, and lenders could begin to ease credit conditions. The Fed’s recent rate cuts, along with the expectation of another in December, should help make borrowing cheaper and more accessible for Main Street.
What This Means for Small Business Owners
For small business owners, the landscape is challenging but not without opportunity. Credit remains available, yet demand is subdued as firms grapple with higher costs and shrinking margins. Many owners are tightening their operations, paying close attention to cash flow and debt management since absorbing financial shocks has become harder.
Tariffs have added another layer of complexity by raising input costs and lowering demand in certain sectors, forcing some businesses to rethink pricing strategies or supply chains. The labor market has also softened, with job cuts among small firms likely to weigh on both growth and confidence. However, falling interest rates could offer a lifeline in the months ahead. As borrowing becomes cheaper, businesses that plan ahead may be well positioned to take advantage of improved lending conditions once relief begins to arrive in late 2025 and early 2026.
Keep Your Business Goals Within Sight
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