From Forbes: Chris Scharman is CEO of Avtech Capital, with 20+ years as a corporate attorney in finance, securities, and mergers & acquisitions.
The Economic Factors Driving Stricter Lending Standards
Economic fluctuations play a role in lending practices. Recent data shows that U.S. banks are indeed retrenching. According to the Federal Reserve’s January 2025 Senior Loan Officer Opinion Survey, 12.5% of banks reported tightening lending standards for commercial and industrial loans to large and middle-market firms—up from 4.8% in the previous quarter. This marks a significant shift toward caution as lenders prepare for continued economic uncertainty and potential loan defaults.
Broader market signals support this trend. A March 2025 Reuters analysis noted that tighter credit and slower spending patterns among businesses are clouding the Federal Reserve’s outlook, further reinforcing the idea that access to capital is narrowing for many borrowers.
With costs of goods and services climbing, businesses may struggle to maintain cash flow. This can make lenders more cautious about extending credit.
Moreover, uncertainty in global markets brings instability, prompting banks to tighten their lending criteria. Lending is often seen as a key economic driver; however, when economic forecasts predict a downturn, institutions prefer safer assets over extending loans. This cautious approach can lead to a ripple effect, where businesses find it increasingly difficult to invest in new equipment or expand operations, ultimately stunting growth and innovation.
Technological Innovation’s Impact On Lending
New technology reshapes the methods banks use to evaluate loan applications. While innovations such as big data analytics and artificial intelligence streamline risk assessment, they can also lead to heightened expectations from lenders regarding credit scores and financial health.
These advancements can be a double-edged sword. While they aim to reduce loan defaults by offering tailored lending options, they can inadvertently eliminate potential borrowers who don’t meet the stringent criteria. Automated systems can sometimes overlook the qualitative aspects of a business, such as its reputation, customer relationships and market potential, which are critical for a comprehensive evaluation.
