While the number and overall value of loans to small businesses continues to decline, the rate of decline may be leveling off, according to San Francisco Fed economists Liz Laderman and James Gillan.  In an Economic Letter, Laderman and Gillan chart lending to small businesses from large and small banks.  Here's the trend for large banks:

Laderman and Gillan write:

The small business loan trend at large banks is similar to the trend for all banks. Aggregate small business loans at large banks shrank between June 30, 2008, and June, 30, 2009, at a steeper rate from then until June 30, 2010, and more slowly over the four quarters to June 30, 2011 (Figure 1). At those large banks, the rate of contraction moderated for small CRE loans and especially for small C&I loans.

The moderation in C&I contraction since mid-2010 is consistent with the results of the Federal Reserve’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices, which gathers data from approximately 60 large domestic banks plus some U.S. branches and agencies of foreign banks. The July 2010 survey was the first to show an easing of standards on C&I loans to smaller businesses since late 2006 (Federal Reserve Board 2010).

But, whether positive growth in small C&I loans at large banks will soon occur and be sustained may depend on small business loan demand. The National Federation of Independent Business reports that about 25% of the small businesses it surveys cite poor sales as their main business problem. In contrast, only 3% cite financing as their main business problem, although 8% report that not all of their credit needs are satisfied (Dunkelberg and Wade 2011).

It appears that a key variable for banks, small banks in particular, is whether small business loans are backed by commercial real estate or not.  Those loans not backed by real estate are looking more promising.  Read Recent Trends in Small Business Lending here.