We have tracked the decline in small business applicant credit quality across 15 straight quarters through 4Q25, and in 1Q26 it declined again, the 16th in a row. What changed is on the demand side. According to the latest Federal Reserve Bank of Kansas City Small Business Lending Survey, for the first time in four years, lenders are seeing more small businesses seek capital.
Borrowing to operate, not to grow
New lending followed, and businesses are borrowing to operate rather than to grow. A line of credit funds working capital: payroll, inventory, and the cash-flow gaps that open when customers pay slowly. A term loan funds expansion. The figures show which businesses are reaching for: total new loan balances rose 9.9% from a year earlier, but new lines of credit rose 31.1% while new term loans slipped 0.9%.
The soft demand for term loans is consistent with a signal we flagged in June, when small business capital spending plans sat near a 17-year low, according to NFIB data. Businesses that are not planning to expand do not seek the loans that fund expansion.
Why the form the credit takes matters
A term loan is underwritten once. A line of credit stays open, and lenders keep watching how you use it. How fully you draw on a line, and whether you pay it back down, signals whether you are operating from strength or leaning on credit to cover costs. Banks have reported rising credit line usage for 10 straight quarters, and among those reporting higher usage, 83% pointed to changes in their borrowers’ revenue.
The approval bar did not move down
More businesses asking does not mean the bar is lower. Borrower financials remained the most common reason for denial, cited by 71% of lenders. More businesses are getting capital, but the standard they are measured against holds firm.
What this means for your business
Treat a line of credit as something you manage, not just something you hold. Keep your utilization at a level you can explain, and put your financials in order before you need to draw, not after. The owners who turn this opening into future capital are the ones who stay ready between requests.
Our Becoming Bankable® program helps owners build and hold that kind of lender-ready profile. Schedule a free discovery session, and let’s strengthen your position before your next request.