US businesses are borrowing less from banks. Is cheaper financing drawing them elsewhere?

Business demand for bank loans in the United States weakened in the third quarter for the first time in more than a year, as companies turned to more attractive financing options offered by other banks and non-bank lenders, a Federal Reserve survey showed.

The decline comes even as business investment remains strong, raising questions about whether companies are pulling back on borrowing or simply changing where they obtain credit.

The Federal Reserve's quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices, released on Monday, found that banks attributed weaker demand for commercial and industrial (C&I) loans partly to reduced customer investment in plant and equipment and partly to borrowers shifting towards more attractive funding sources.

Banks said customers were increasingly looking at financing options available from other banks and non-bank institutions.

The last time the survey recorded weaker demand for commercial loans was in the second quarter of 2025. However, banks did not then identify borrowers shifting to other lenders as a reason for the decline.

This time, the findings suggest that weaker demand for bank credit may not necessarily reflect a broad-based slowdown in business investment. Companies could still be spending on expansion and equipment while becoming more selective about the cost and source of their financing.

Business investment tells a different story

Government data released last week showed that spending by US businesses on equipment rose at an annualised rate of 20.9 per cent in the previous quarter.

That was the biggest contribution from equipment investment to US economic growth in any quarter in six years.

It suggests that businesses may be increasingly exploring financing alternatives rather than relying exclusively on traditional bank credit.

These alternatives can include borrowing from other banks, private credit providers and other non-bank financial institutions. Depending on the borrower and the structure of the loan, such sources may offer more competitive pricing or different financing terms.

The Fed survey, however, does not establish how much of the decline in bank loan demand was directly caused by borrowers switching lenders.

Banks keep lending standards largely steady for bigger companies

The survey also offered some encouraging signals about credit availability for businesses.

Bank loan officers reported little change in lending standards for commercial and industrial loans to large and midsized companies.

For smaller businesses, however, banks reported tighter lending standards.

Banks said they had tightened requirements for riskier loans but eased or largely left unchanged most of the other lending terms covered by the survey.

Among banks that tightened commercial lending standards, the most frequently cited reasons were a less favourable or more uncertain economic outlook and worsening conditions in specific industries.

Analysts at Oxford Economics described the lack of further tightening for large companies as an encouraging development.

They said it offered another reason to expect business investment to broaden beyond artificial intelligence-related spending.

What the survey says about household borrowing

The Fed survey also showed mixed trends in household credit demand.

Banks reported a sharp weakening in demand for residential real estate loans and a decline in demand for auto loans.

In contrast, demand for credit card borrowing recorded its strongest increase in four years.

The divergence points to different borrowing patterns among American households. Demand for housing and vehicle financing weakened, while more consumers appeared willing to use credit cards.

Credit card borrowing is generally more expensive than many other forms of consumer credit. A sustained increase in demand could therefore have implications for household borrowing costs and debt repayment.

Why the survey matters for the Fed

The findings were among the economic indicators available to Federal Reserve policymakers when they met on October 27–28 and decided to keep short-term borrowing costs unchanged.

The Senior Loan Officer Opinion Survey provides the central bank with an assessment of lending conditions across the US banking system, including changes in credit demand, lending standards and the terms banks offer borrowers.

For policymakers, the latest results present a mixed picture.

Weaker demand for commercial bank loans could indicate that some businesses are becoming more cautious about borrowing. But strong equipment investment and largely unchanged lending standards for larger companies suggest that credit conditions are not necessarily shutting down business expansion.

The growing availability of alternative financing could also be changing how companies fund their investments.