Business access to credit is getting harder. The cost of credit for those who can get it is incredibly cheap, but business access to credit is becoming more difficult. Good managers, though, can navigate these troubles with foresight and some time with their bankers or would-be bankers.

Bankers are tightening their credit standards for commercial and industrial loans and had tightened real estate lending standards a year ago before going into neutral recently, according to the Federal Reserve’s Senior Loan Officer Survey. As an example, Bank of America is reported to be more conservative in loan underwriting. There have also been reports of slowing farm credit. And I have been picking up anecdotes from bankers that their appetite for loans has eased.

Why Banks Are Tightening Credit Standards: Better Profits and Regulatory Pressure

Some of this caution is coming internally. Back in 2011, banks eased credit standards to help improve earnings. Earnings had begun to recover as loan charge-offs fell, but banks had relatively few earning assets. The loan-deposit ratio, which had been as high as 94 percent, dropped to just 71 percent in 2011. Investments, such as bonds, paid very low interest rates, so bankers fell over each other trying to grow loan portfolios. Credit standards eased and pricing became much more customer friendly.

Now, loan portfolios have grown faster than the overall economy, 7.9 percent over the past 12 months. Bank earnings have improved, setting an all-time record recently. The return on equity remains below peak ratios, but at 9.4 percent it’s tolerable. Thus the internal caution on new loans.

External forces, including regulatory pressure and reduced competition, are the other factors behind tighter credit. Bank examiners are reviewing loan portfolios with little sympathy for “outside the box” thinking.

On top of that, regulatory compliance costs have reduced the number of banks in the country. The bank compliance function has economies of scale, meaning that small community banks have disproportionately higher expenses. Small banks spend about 8.7 percent of their noninterest expenses on compliance, versus 2.9 percent for the largest banks, according to a report by the Federal Reserve Bank of St. Louis.

What a Business Can Do About Tightening Credit Standards: Know the Bankable Line

Whether the company currently has a bank relationship or not, it should try to find the line between bankable and not bankable.

The business that currently has a bank loan needs to learn how much their financial condition can deteriorate before the bank pulls the credit line. In many cases, violating loan covenants can trigger an immediate demand for payment in full, which could mean bankruptcy at worst, and a tedious workout period at best. Talking to the loan officer, or possibly a credit administrator, can help identify the boundary line. That will tell the company how much cushion it currently has. If the company can run a pro-forma financial statement with recessionary sales levels, see what the banker says about that. And don’t worry about frightening your banker—he or she will be happy that you’re doing contingency planning.

Companies that do not have bank credit should find out just how their financials must improve for them to be bankable. The answer may involve more capital, or paying down existing loans, or showing another year of profitable operation. Even if the company has been successful without bank credit, it’s always useful to know what options the business has. If good times come, the business may need credit to fully exploit new opportunities.

Good banks can help their business customers understand these issues. Don’t expect an exact line of demarcation, but expect to get a useful idea of the difference between bankable and not bankable. If your banker cannot help you, it’s time to shop for a different bank. Plenty of institutions have knowledgeable loan officers who understand underwriting criteria. Don’t put up with a bank that doesn’t.