Entering 2025, many small and mid-sized business (SMB) owners were optimistic due to a stronger economy, decreased interest rates, and easier credit access. However, the situation has become more complex a few months into the year. Recent data indicates a decline in optimism and an increase in uncertainty among SMBs, coupled with early signs of banks starting to tighten lending standards.

If you’re a business owner, it’s important to prepare now. Here’s what’s occurring and how to strategically position your company for success in an evolving credit landscape.

Optimism is slipping, uncertainty is rising

The Small Business Optimism Index from the National Federation of Independent Businesses (NFIB) declined by 2.3 points in January 2025 to 102.8. Although it remains above the long-term average of 98, this is a significant change. More notably, the NFIB Uncertainty Index surged by 14 points to 100 — marking its third-highest reading ever.

While one month of data doesn’t signal a crisis, it could indicate that small businesses are hitting unexpected turbulence. The NFIB found fewer owners plan to make capital outlays in the next six months, with numbers falling from 27% in December to 20% in January.

What’s behind the dip in confidence? Inflation and labor quality were tied as the top operational concerns, each cited by 18% of respondents. Meanwhile, only 17% said now is a good time to expand — a three-point drop from the previous month.

For SMBs hoping to borrow in 2025, these trends suggest a more cautious outlook, not just among business owners but among the lenders they rely on.

A new credit squeeze may be forming

The Federal Reserve’s January 2025 Senior Loan Officer Opinion Survey (SLOOS) reveals that banks are beginning to tighten credit standards for small business borrowers, especially those with lower credit scores.

Here’s what the data showed from Q4 2024:

• 14.3% of banks tightened credit standards for SMB loans
• 13.1% increased premiums for higher-risk SMB borrowers
• 11.9% are using more interest rate floors for small business loans

Why the shift? A majority of banks cited a more uncertain economic outlook (68.4%), industry-specific concerns (63.2%), and reduced risk tolerance (55%) as reasons for tightening standards.

In short, banks are seeing what SMBs are feeling — more risk, less clarity and a need to protect their own exposure. For business owners with weaker credit profiles or limited borrowing history, this could translate into fewer options and tougher terms.

How to navigate a tougher lending environment

This might not be a long-term crisis, but smart SMBs are already getting ahead of it. Whether you’re planning a major investment or simply want to preserve access to working capital, now is the time to strengthen your financial position and explore all your financing options.

Here are four ways to prepare:

1. Tighten operations and strengthen your balance sheet.

   Look for ways to boost profitability, cut costs, and improve cash flow. The stronger your financials, the better your chances of qualifying for credit if lending tightens further.

2. Secure financing before you need it.

   It’s better to borrow on your terms, not out of necessity. Maintain your credit lines, build relationships with lenders, and take advantage of favorable conditions while they last.

3. Don’t count on rate cuts.

   As of April 2025, the Fed hasn’t moved to lower rates, and long-term yields remain stubbornly high. If you’re hoping to refinance or secure lower-cost credit, don’t assume it’s just around the corner.

4. Think beyond traditional banks.

   If banks are saying no — or offering unattractive terms — look to non-bank lenders, fintechs, and asset-based financing. These providers may be more flexible and better suited to your business model.

Final thoughts

There’s no need to panic, but there is a clear need to plan. Credit conditions are shifting. Optimism is softening. And banks are proceeding with caution.

The good news? You can too, without missing growth opportunities. The SMBs that succeed in uncertain times are the ones that stay adaptable, explore diverse financing strategies and act before challenges become urgent.

In my experience, non-bank lenders who understand the realities of running a business offer the kind of flexibility, speed and partnership that help companies thrive, no matter what the economy does next.