THE BARATELLI INSTITUTE · Mentoring at Scale
THE BARATELLI INSTITUTE · Mentoring at Scale
The first reading of the Hometown Credit Index is 37.5 on a 100-point scale where 50 is neutral. Banks are lending again and cutting spreads. The SBA is making fewer, larger loans under stricter rules. The price of money turned up in September. Borrowers who arrive prepared are getting financed.
*The 504 average covers the first nine months of FY2026, through June 30. The full-year 504 count posts with the SBA's year-end data in November. Readings throughout are the latest published as of October 22, 2026, and each one carries its own measurement date in the report.
| Gauge | Latest reading | Direction | Score |
|---|---|---|---|
| Bank lending standards | +1.8 net percent tightening | Neutral | 0 |
| Loan demand | +3.6 net percent stronger | Neutral | 0 |
| Cost of credit | Net 8 percent paying more | Headwind | −1 |
| SBA access | 7(a) count down 28 percent | Strong headwind | −2 |
| Credit quality | Delinquency down 13 basis points | Tailwind | +1 |
| Business-sale market | Closed transactions down 7 percent | Headwind | −1 |
| Hometown Credit Index | Selective | 37.5 | |
How the score becomes the index. Index = 50 + 50 × (sum of scores ÷ 12). Six gauges at a maximum of plus or minus two each put the sum between minus twelve and plus twelve, so the scale runs from zero to one hundred and the midpoint is a market doing nothing in particular. This edition sums to minus three, which is 37.5.
Readings drawn from the Federal Reserve Senior Loan Officer Opinion Survey, July 2026; the NFIB Small Business Economic Trends report, September 2026; SBA 7(a) approval counts for FY2026 against FY2025; the Equifax Small Business Credit Trends report, August 2026; and the BizBuySell Insight Report for the third quarter of 2026.
37.5 is a selective market, not a closed one. Banks have money and want good loans. Four of the six gauges are neutral or better, and the two that drag — the price of money and access to an SBA guarantee — are both the product of deliberate policy rather than of a damaged banking system. A borrower who can document cash flow is facing a tougher screen, not a locked door.
The lender makes the loan and the SBA guarantees part of it — up to 85 percent on loans of $150,000 or less, and 75 percent above that. Loans run to $5 million. Terms reach ten years for most purposes and twenty-five years where real estate is involved. This is the program behind most business acquisitions.
Three parties fund one project. A bank takes roughly half, a certified development company takes roughly 40 percent through an SBA debenture, and the owner contributes as little as 10 percent. The SBA portion reaches $5 million, or $5.5 million for manufacturers and certain energy projects, at a rate fixed for ten, twenty or twenty-five years.
Two years ago a net 13 percent of banks were tightening standards on small-firm loans. In the July 2026 survey the figure is +1.8, and the Federal Reserve's own language is that standards for small firms are now easier than the midpoints of their historical ranges. That is not a recovering credit market. That is a normal one.
The more useful detail is in the terms, because a bank that holds its standards and cuts its price is competing for the loan. On the July 2026 survey, reported as net percent tightening:
| Loan term | Net percent tightening, July 2026 | Reading |
|---|---|---|
| Spreads over the bank's cost of funds | Easing | −14.5 |
| Cost of credit lines | Easing | −7.3 |
| Maximum size of credit lines | Easing | −1.9 |
| Premiums charged on riskier loans | Unchanged | 0.0 |
| Collateral requirements | Unchanged | 0.0 |
The pattern is consistent: price came down, structure did not move. Banks are buying volume with spread rather than with looser underwriting, which is the behaviour of a lender that wants more loans of the kind it already likes.
The Federal Reserve Bank of Kansas City surveyed 146 lenders for the second quarter of 2026. New loan balances rose 8.5 percent and new credit lines rose 20.9 percent. Floor spreads on lines fell 96 basis points. Median variable rates on term loans sat near 7.0 percent in metropolitan markets and 6.7 percent in rural ones.
Two numbers from that survey are worth carrying into any loan conversation. Sixty-nine percent of lenders named the quality of borrower financial statements as the leading reason an application is declined. The same 69 percent expect inflation to weigh on loan demand, up from 46 percent a year earlier. The first of those is inside a borrower's control, entirely.
Federal Reserve Senior Loan Officer Opinion Survey, July 2026, FRED series DRTSCIS and DRSDCIS. The October survey publishes on November 2, 2026 and will be the first revision to this gauge. Federal Reserve Bank of Kansas City Small Business Lending Survey, second quarter 2026, 146 respondent lenders.
Fiscal 2026 closed on September 30 with 56,130 7(a) loans for $32.4 billion — a 28 percent fall in count and a 13 percent fall in dollars against fiscal 2025's record $37.3 billion. It is still above fiscal 2024's $31.1 billion. The average 7(a) loan rose 21 percent to about $577,000. The 504 program finished near $7.1 billion.
Fewer loans, larger loans. That is one market, not two, and four things produced it. A 43-day government shutdown meant no 7(a) approvals at all in October 2025. Full underwriting returned for small loans that had previously moved on a lighter file. Eligibility narrowed to businesses owned entirely by United States citizens or nationals. And smaller loans absorbed most of the decline, because a smaller loan is the one whose economics break first when the file gets heavier. July through September was the busiest quarter of the year, which is what a backlog clearing looks like.
| Change | What it did | Effective |
|---|---|---|
| SOP 50 10 8 | Restored full underwriting on small loans | June 1, 2025 |
| Government shutdown | No 7(a) approvals for 43 days | Oct–Nov 2025 |
| Citizenship limit | Ownership must be 100% U.S. citizens or nationals | March 1, 2026 |
| Base-rate change | SOFR and Treasury added as permitted base rates | March 1, 2026 |
| Combined exposure limit | Up to $10 million across 7(a) and 504 together | July 4, 2026 |
| SOP 50 10 8.1 | 1.25x coverage on acquisitions from historical earnings; quality of earnings at $3M+; independent valuation on changes of ownership | October 1, 2026 |
| FY2027 fee relief | Zero upfront guarantee fee to $700,000 for manufacturing, food supply chain and rural borrowers | October 1, 2026 |
A 28 percent fall in loan count reads as a credit contraction and is mostly a paperwork contraction. The guarantee did not get smaller and the money did not leave. What changed is how much documentation stands between an application and an approval — which is why this gauge scores minus two while the bank gauge scores zero, and why the two are not in conflict.
On September 16 the Federal Reserve raised its target range to 3.75 to 4.00 percent, the first increase since 2023. Prime moved to 7.00 percent — which is still a quarter point below where it stood a year ago, at 7.25 percent. Both of those facts belong in the same sentence, because a borrower comparing today against last month sees an increase and a borrower comparing against last year sees a decrease.
NFIB members reported paying an average 8.2 percent on short-term borrowing in September, up from 7.5 percent in August, against a long-run average of 8.3 percent. A net 8 percent said they were paying more than three months earlier, the highest share since June 2025. The SBA's 25-year 504 debenture priced at 6.97 percent at the October 8 sale, against 6.54 percent in September.
The 7(a) variable-rate maximums are set as a spread over prime by regulation, so at a 7.00 percent prime the ceilings are arithmetic rather than negotiation:
| Loan size | Maximum spread | Ceiling at 7.00% prime |
|---|---|---|
| $50,000 or less | Prime + 6.5% | 13.50% |
| $50,001 to $250,000 | Prime + 6.0% | 13.00% |
| $250,001 to $350,000 | Prime + 4.5% | 11.50% |
| Over $350,000 | Prime + 3.0% | 10.00% |
Maximum allowable variable rates for 7(a) loans, 13 CFR 120.214. These are ceilings, not quotes; a well-documented borrower over $350,000 is frequently inside the 10.00 percent maximum. The next Federal Open Market Committee decision is October 28, 2026, and a second increase would put prime at 7.25 percent.
The Federal Reserve's Small Business Credit Survey covers 6,525 employer firms. Thirty-eight percent applied for financing. Of those, 42 percent received everything they asked for, 36 percent received part of it, and 22 percent received nothing. Rather more than three quarters of applicants got some money.
Where they applied matters, and the ranking is not the one most borrowers assume:
| Lender | Fully approved | At least partly approved |
|---|---|---|
| Small bank | 57% | 80% |
| Finance company | 50% | 81% |
| Credit union | 44% | 70% |
| Reason given | Share of denied applicants |
|---|---|
| Lender requirements too strict | 46% |
| Too much existing debt | 37% |
| Low credit score | 30% |
| Insufficient collateral | 29% |
| Weak sales | 29% |
| “Lenders don't fund businesses like mine” | 29% |
Twenty-nine percent of applicants went to an online lender, and 60 percent of those found the cost higher than they expected. Read alongside the small-bank approval rate of 80 percent, that is the single most actionable finding in this edition: the cheapest lender in the sample is also the one most likely to say yes, and it is the one a borrower is least likely to try first.
Federal Reserve Banks' Small Business Credit Survey, 2026 Report on Employer Firms, 6,525 respondent firms.
Equifax reports small-business delinquency of 1.65 percent at 31 to 90 days past due in August 2026, and a twelve-month default index of 3.18 percent. Both are lower than a year earlier. All-bank business-loan delinquency eased to 1.27 percent in the second quarter.
| Quarter | Delinquency rate | Charge-off rate |
|---|---|---|
| Q2 2025 | 1.29% | 0.58% |
| Q3 2025 | 1.33% | 0.57% |
| Q4 2025 | 1.34% | 0.56% |
| Q1 2026 | 1.33% | 0.59% |
| Q2 2026 | 1.27% | 0.58% |
There is one exception and it explains the year. The trailing-twelve-month default rate on 7(a) loans reached about 4.8 percent in March 2026, the highest since 2013. That is a figure about the guaranteed portfolio specifically, not about bank business lending generally — and it is why the SBA tightened. The rule changes in Section 3 are the response to the number in this paragraph.
Equifax Small Business Credit Trends, August 2026. FRED series DRBLACBS and CORBLACBS for all-bank delinquency and charge-offs. The 7(a) trailing default figure is Lumos Data, March 2026.
BizBuySell recorded 2,132 closed transactions in the third quarter — flat against the second quarter and down 7 percent year over year — at a median price of $350,000, up 17 percent. The median business that sold carried $669,801 of revenue and $156,000 of cash flow.
| Measure | Reading |
|---|---|
| Price to cash flow, businesses over $1M | 3.73x |
| Price to cash flow, businesses under $1M | 2.30x |
| Buyers planning SBA financing | 78% |
| Brokers naming SBA financing as the top obstacle | 38% |
| Brokers naming interest rates as the top obstacle | 34% |
| Buyers expecting seller financing | 90% |
| Owners planning to offer seller financing | 29% |
| Brokers expecting more transactions within six months | 66% |
For larger businesses, GF Data put average transaction multiples at 7.0x EBITDA in the second quarter of 2026, with total debt at 2.9x and senior debt pricing at 7.8 percent. Pepperdine's survey places businesses below $1 million of EBITDA at four to five times. A seller reading a headline multiple from the upper-middle market and applying it to a $150,000 cash-flow business is reading the wrong table.
Seller financing. Ninety percent of buyers expect it and 29 percent of owners plan to offer it. That gap is not a negotiating preference, it is a structural problem, because a standby seller note can cover at most half of the buyer's 10 percent equity injection under the SBA rules. A seller who will not carry paper has narrowed the buyer pool to those with the full injection in cash.
Preparation. About one engagement in three fails, usually over a price gap of 11 to 20 percent, and 64 percent of sellers have no formal exit plan. An eleven-point gap is closeable with documentation. It is rarely closeable with argument.
BizBuySell Insight Report, third quarter 2026. GF Data, second quarter 2026. Pepperdine Private Capital Markets Report.
Florida took $2.14 billion of 7(a) approvals through July 31, 2026, third among the states. Its four largest metropolitan markets list more than 41,000 businesses for sale between them.
| Metro | Listings | Median asking price | Median cash flow | Asking / cash flow |
|---|---|---|---|---|
| Miami–Fort Lauderdale | 18,139 | $325,000 | $140,955 | 3.07x |
| Tampa–St. Petersburg | 12,219 | $300,000 | $131,467 | 2.95x |
| Orlando–Kissimmee | 7,588 | $270,000 | $122,488 | 2.87x |
| Jacksonville | 3,521 | $269,500 | $122,180 | 2.86x |
The spread between the most expensive and the cheapest of those four metros is about one fifth of a turn. For a buyer willing to move, geography inside Florida is not where the value is; the condition of the seller's books is.
SOP 50 10 8.1 took effect on October 1, 2026. These are the terms a borrower will be held to, and the first one is the one that resets expectations: coverage is measured on historical earnings, not on a projection.
| Requirement | What the rule says |
|---|---|
| Debt service coverage, acquisitions | 1.25x on historical cash flow — the last fiscal year or a two-year average. Projections do not count. |
| Debt service coverage, expansions | 1.15x |
| Equity injection | 10% of the project, with standby seller debt counting for at most half of it |
| Quality of earnings | Required at $3 million or more, commissioned by the lender |
| Business valuation | Independent valuation required on a change of ownership |
| Eligibility | Ownership must be 100% U.S. citizens or nationals |
| Maximum variable rate over $350,000 | Prime + 3.0%, which is 10.00% today |
Tie the three documents together before you apply. Tax returns, financial statements and bank deposits have to agree. Sixty-nine percent of lenders named financial statement quality as the top reason for a decline; that is the gauge a borrower controls outright.
Plan for 1.35x, not 1.25x. The minimum is a floor a file has to clear after the lender has made its own adjustments, not a target to land on.
Price on the cash flow a lender will accept — not on add-backs it will strike. The difference between seller's discretionary earnings and lender-adjusted cash flow is where most of the 11 to 20 percent price gap actually lives.
Line up quality of earnings early at $3 million and above. It is now on the critical path rather than beside it, and a QoE commissioned late is a closing delay with a date attached.
Sellers: offer a standby note and hold a valuation. Those two documents do more to widen a buyer pool than any change to the asking price.
Each gauge is scored against fixed thresholds. The thresholds do not move between editions, so a reading is comparable to the reading before it rather than to a shifting standard. All six are scored from minus two to plus two, where a positive score means the gauge favours the borrower.
| Gauge | Scoring rule |
|---|---|
| Bank lending standards net percent tightening | Below −10: +2 · −10 to 0: +1 · 0 to 10: 0 · 10 to 20: −1 · above 20: −2 |
| Loan demand net percent stronger | Below −20: −2 · −20 to −5: −1 · −5 to 5: 0 · 5 to 20: +1 · above 20: +2 |
| Cost of credit net percent paying more | Below −15: +2 · −15 to −5: +1 · −5 to 5: 0 · 5 to 15: −1 · above 15: −2 |
| SBA access percent change in 7(a) count | Below −20: −2 · −20 to −5: −1 · −5 to 5: 0 · 5 to 20: +1 · above 20: +2 |
| Credit quality percent change in delinquency | Below −25: +2 · −25 to −5: +1 · −5 to 5: 0 · 5 to 25: −1 · above 25: −2 |
| Business-sale market percent change in closed sales | Below −20: −2 · −20 to −5: −1 · −5 to 5: 0 · 5 to 20: +1 · above 20: +2 |
Every figure in this edition carries two dates: when the edition was prepared, and when the figure itself was measured by whoever measured it. Those are not the same date and the second one is the one that can go stale. The SBA 504 average here is a nine-month figure through June 30, and it is labelled as one rather than presented as a full year. The prime rate is as of September 16. The bank-standards reading is the July survey, and it will be superseded on November 2. Readings are the latest published as of October 22, 2026.
Sources in full: Federal Reserve Senior Loan Officer Opinion Survey (July 2026); Federal Reserve Bank of Kansas City Small Business Lending Survey (Q2 2026); Federal Reserve Banks' Small Business Credit Survey, 2026 Report on Employer Firms; NFIB Small Business Economic Trends (September 2026); U.S. Small Business Administration 7(a) and 504 approval data (FY2026); 13 CFR 120.214; Equifax Small Business Credit Trends (August 2026); FRED series DRTSCIS, DRSDCIS, DRBLACBS, CORBLACBS; Lumos Data (March 2026); BizBuySell Insight Report (Q3 2026); GF Data (Q2 2026); Pepperdine Private Capital Markets Report.
I learned lending in bank loan review, where you see every reason a loan gets made and every reason it does not. The reasons have not changed much. What changes is how well prepared the borrower is when the file lands on a credit officer's desk.
The money is there. Get your numbers in order, and go get it.
The Baratelli Institute is a publisher. Nothing in this edition is investment advice, legal advice, or a recommendation to enter into any particular financing. Every figure is drawn from a published source named above and carries the date on which that source measured it.
Related-party disclosure. The Institute's founder also leads Baratelli Transaction Advisory, LLC, which provides quality of earnings, due diligence and lender services — including the work the SBA's new quality of earnings rule discussed in Sections 3 and 9 now requires. A reader should weigh the Institute's reporting on that rule with that relationship in view.
The index is the free quarterly reading. These are the instruments behind it.