When asked to anticipate which factors would influence small business loan _ demand, nearly 70% of survey respondents indicated inflation would have a negative impact over the next year. In the second quarter of 2026, small and midsized banks _ reported a slight increase in loan demand, whereas large banks reported a decrease. New and outstanding small business lending increased when compared with the same period in 2025, while interest rates mostly declined.
With more than $66 billion in small business loans reported, the 146 survey respondents indicated that credit standards tightened, and credit quality had continued to decline, while application approval rates had decreased for small banks. Over the next 12 months, respondents, on net, indicated that the most likely factors to have an impact on loan demand would be inflation, trade policy, and cost of labor.
Chart 1: Outstanding Small Business (SB) Loans Increase
Note: Items are calculated using a subset of 88 respondents that completed the FR 2028D for the last five quarters surveyed. Sources: Call Report, Schedule RC-C Part I, items 4. Commercial and Industrial Loans and 12. Total Loans and Leases Held for Investment and Held for Sale, and FR 2028D, items 5.b and 6.c.
When compared with the second quarter of 2025, outstanding small business loans increased by 2.9%, C&I loans increased by 2.7%, and total loans increased by 4%. The year-over-year increase in small business loans was reported across all bank sizes and was primarily due to increases in variable-rate loans. Quarter over quarter, C&I loans and total loans both increased by 1.1%, and small business loans increased by 0.8%.
Chart 2: New Small Business Lending Increases
Note: Items are calculated using a subset of 88 respondents that completed the FR 2028D for the last five quarters surveyed. All loan types referenced in Chart 2 refer to small business lending. Source: FR 2028D, items 7.b and 8.c.
Compared with the second quarter of 2025, total new loan balances increased by 8.5%, with a 4.5% increase in new term loans and a 20.9% increase in new credit lines. The year-over-year increase in term loans was driven by large banks, while the increase in credit lines was driven by midsized banks. Quarter over quarter, total new loan balances increased by 9.7%, with a 9.8% increase in new term loans and a 9.4% increase in new credit lines.
Chart 3: Median Credit Line Usage Declines Slightly
Note: Usage refers to the proportion of the outstanding balance relative to the total committed amount (i.e., credit used vs. credit available). Source: FR 2028D, items 6.b and 6.c
Quarter over quarter, median total credit line usage decreased slightly, from 40.7% to 40.2%. Median usage of fixed-rate lines of credit increased to 54.7%, while usage of variable-rate lines of credit decreased to 38%.
Variable-rate lines continued to constitute a larger portion of credit lines issued by banks, with respondents indicating they made up about 91% of total credit line usage.
Chart 4: Median Interest Rates Decrease for New Term Loans
Note: Items are calculated using a subset of 88 respondents that completed the FR 2028D for the last five quarters surveyed. Urban banks make up about 88% of the subset of respondents. Source: FR 2028D, item 7.c.
Quarter over quarter, most rates on new term loans decreased slightly, while fixed rates on new term loans offered at urban banks remained stable. Variable rates offered at urban banks remained the highest, at 7%, while variable rates offered at rural banks were the lowest, at 6.7%. The largest year-over-year change was for variable rates offered at rural banks, declining by 80 basis points_.
Chart 5: Median Interest Rates on Urban New Lines of Credit (LOC) Decrease
Note: Items are calculated using a subset of 88 respondents that completed the FR 2028D for the last five quarters surveyed. Urban banks make up about 88% of the subset of respondents. Source: FR 2028D, item 8.d.
In the second quarter of 2026, median interest rates on all new lines of credit offered at urban banks decreased, while fixed rates offered at rural banks increased. Quarter over quarter, the largest changes were a 36-basis-point decrease in fixed rates offered at urban banks and a 29-basis-point increase in fixed rates offered at rural banks. Year over year, the largest changes were a 94-basis-point decrease for variable rates offered at rural banks and a 92-basis-point decrease in variable rates offered at urban banks.
Chart 6: Interest Rate Floor Spreads Decrease
Note: Spread refers to the distance between the weighted average nominal interest rate and the weighted average interest rate floor. As of 2025:Q3, there was a methodology change impacting the calculation of median spread for term loans and lines of credit. Sources: FR 2028D, items 5.c, 5.h, 6.d, 6.g
Quarter over quarter, median line of credit spreads decreased by 24 basis points, while term loans spreads decreased by 10 basis points. Year over year, median interest rate floor spreads for lines of credit decreased by 96 basis points, while median term loan spreads decreased by 27 basis points.
Chart 7: All Bank Sizes Report Continued Increases in Credit Line Usage
Note: Chart 7 shows diffusion indexes for credit line usage. The diffusion indexes show the difference between the percentage of banks reporting decreased credit line usage and those reporting increased credit line usage. Net percent refers to the percentage of banks that reported having increased usage (“increased somewhat” or “increased substantially”) minus the percentage of banks that reported having decreased usage (“decreased somewhat” or “decreased substantially”). Source: FR 2028D, items 9 and 10.
In the second quarter of 2026, 18% of respondents reported a change in credit line usage. About 11% of respondents, on net, indicated that credit line usage had increased, up from 5% last quarter.
On net, all bank sizes reported an increase in credit line usage for the 11th straight quarter. Of the banks that reported an increase, about 95% cited changes in local or national economic conditions and 91% cited changes in borrower’s business revenue or other business specific conditions as somewhat or very important reasons.
Chart 8: Respondents Report Slight Increase in Loan Demand
Note: Chart 8 shows diffusion indexes for loan demand. The diffusion indexes show the difference between the percentage of banks reporting weakened loan demand and those reporting stronger loan demand. Net percent refers to the percentage of banks that reported having stronger loan demand (“moderately stronger” or “substantially stronger”) minus the percentage of banks that reported having weakened loan demand (“moderately weaker” or “substantially weaker”). Source: FR 2028D, item 11.
About 26% of respondents reported a change in small business loan demand in the second quarter of 2026. On net, about 3% of respondents indicated stronger loan demand, driven by small and midsized banks. Large banks were the only bank size to report a net decrease in loan demand.
The marginally stronger loan demand is consistent with the External LinkJuly 2026 Federal Reserve Senior Loan Officer Opinion Survey (SLOOS), where C&I loan demand was reported to have remained basically unchanged for small firms (annual sales of less than $50 million).
Chart 9: Overall Credit Quality Continues to Decline
Note: Chart 9 shows diffusion indexes for credit quality of applicants. The diffusion indexes show the difference between the percentage of banks reporting a decline in credit quality and those reporting improvement in credit quality. Net percent refers to the percentage of banks that reported improving credit quality (“improved somewhat” or “improved substantially”) minus the percentage of banks that reported declining credit quality (“declined somewhat” or “declined substantially”). Source: FR 2028D, items 18 and 19.
In the second quarter of 2026, 15% of respondents reported a change in applicant credit quality. On net, about 7% of survey respondents reported that applicant credit quality had decreased, continuing the long-term trend of declining credit quality that began in the second quarter of 2022.
Of the respondents reporting a change in credit quality, whether an increase or a decrease, 96% cited debt-to-income levels of business owners and liquidity positions of business owners as somewhat or very important reasons. Other commonly cited reasons included quality of business collateral and personal wealth of business owners.
Chart 10: Inflation Expected to Negatively Impact Small Business Loan Demand
Source: FR 2028D, Special Question.
When asked to rate the impact several factors could have on small business lending over the next 12 months, respondents, on net, indicated that inflation, trade policy, and cost of labor were the most likely factors to have an impact. Quarter over quarter, the factor with the largest change in sentiment was interest rates, with 18% of respondents, on net, believing it would have a negative impact, compared with last quarter, when 8% believed it would have a positive impact.
Interest rates and inflation have seen the largest shifts in sentiment year over year, with respondents' views trending negative. Sentiment for interest rates declined 35 points, moving from 17% expecting a positive impact in the second quarter of 2025 to 18% expecting a negative impact in the second quarter of 2026. Inflation sentiment has shifted 23 points, with the share of respondents expecting it to have a negative impact rising from 46% to 69%.
Chart 11: Application Approval Rates Decrease for Small Banks
Source: FR 2028D, items 12.a and 13.
Quarter over quarter, application approval rates decreased by 3% for small banks, while approval rates increased by 1% for large banks and remained stable for midsized banks. Year-over-year approval rates increased by 3% for small and midsized banks, while large banks remained stable.
About 69% of respondents indicated borrower financials as the most common reason for denying a loan. Other commonly cited reasons were credit history and collateral.
Chart 12: Respondents Continue to Tighten Credit Standards
Note: Chart 12 shows diffusion indexes for credit standards (purple bar) and various loan terms. The diffusion indexes show the difference between the percentage of banks reporting tightening terms and those reporting easing terms. Net percent refers to the percentage of banks that reported having tightened terms (“tightened somewhat” or “tightened considerably”) minus the percentage of banks that reported having eased terms (“eased somewhat” or “eased considerably”). Source: FR 2028D, items 14, 15, 16 and 17.
In the second quarter of 2026, about 8% of respondents, on net, reported tightening credit standards (purple bar). This continues the long-term trend of tightening credit standards, which varies slightly from the External LinkJuly 2026 Federal Reserve Senior Loan Officer Opinion Survey (SLOOS), where credit standards remained basically unchanged.
On net, respondents indicated that all loan terms had continued tightening. About 73% of respondents cited less favorable or more uncertain economic outlook as a somewhat important or very important reason for tightening. Other frequently cited factors were worsening of industry-specific problems and reduced tolerance for risk.
Other contributors to the release include Sophie Ast, Alli Baranski, Lauren Bennett, Mo Freese, Josie Kennedy, and Jordan Pandolfo.
Endnotes
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1 Small business lending refers to commercial and industrial lending to organizations generally defined as having less than $5 million in gross annual revenue, unless otherwise noted.
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2 Small banks have total assets of $1 billion or less, midsized banks have total assets between $1 billion and $10 billion and large banks have total assets greater than $10 billion.
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3 Urban and rural classification is determined exclusively by the bank’s head office location and External LinkU.S. Census Bureau population data.
The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve Bank of Kansas City or the Federal Reserve System.
Authors
Daniel Harbour
Assistant Vice President
