Main Street banks are feeling squeezed by competition from new rivals: nonbanks like hedge funds and private-equity firms that are elbowing into business loans.

The situation is forcing the banks to rethink a business that is a key part of their revenue but which is now weighing down what many had hoped would finally represent a banner year in commercial lending.

Growth in business lending has picked up recently—it was up 3.3% year over year as of May 9, according to Federal Reserve data released Friday, after falling below 1% earlier this year. But the growth rate is still far below where it’s been in recent years, when loans to businesses grew at a double-digit clip for much of 2014, 2015 and 2016.

Banks have been blaming a variety of factors for the lending falloff, including political uncertainty over things like trade policy. In recent conference calls and interviews, bankers highlighted another reason that could prove longer lasting: nonbanks swooping in on their commercial clients by offering looser repayment conditions and longer loan terms.

“That competition has been aggressive,” Greg Carmichael, CEO of Fifth Third Bancorp, said in an interview. “Private equity, REITs, insurance companies—it’s definitely a formidable competitor.”

Hedge funds and private-equity firms can compete with banks because they are more lightly regulated and often flush with cash. Insurance companies and pension funds, interested in steady long-term returns, are bidding for commercial mortgages, bankers said.

“There’s more non-regulated lenders in the market all the time, and I don’t see that trend abating,” Terry Katon, head of capital markets at Regions Financial Corp. , said in an interview.

To be sure, the nonbanks are often pinpointing debt-laden companies that banks would shun. Still, banks are being forced to find ways to adapt.

Mr. Carmichael said Fifth Third is focused on maintaining its long-term relationships with commercial clients, which aren’t based solely on loans. “What a REIT can’t do is provide the technology we have in treasury management or corporate banking,” he said.

Mr. Katon said that when a corporate client chooses to take a loan from a nonbank, Regions will often act as intermediary so that it will earn fee income.

The business-loan malaise has been a puzzle to banks since at least the start of 2017. At that time, the pace of loan growth began to slow despite a relatively buoyant economy and Trump administration promises of deregulation.

The ensuing slump has led to debate among bankers about whether fast-paced business-loan growth is on a brief hiatus or gone for good.

Before the election, bankers said companies were waiting to find out who would be president. Afterward, they said companies were waiting for clarity on policy. They later said companies needed the details on the new tax bill. After that was enacted, they said companies had so much extra cash that they didn’t need to borrow.

Allison Dukes, chief financial officer of SunTrust Banks Inc., said at an industry conference last week that one problem might be abating. Companies last year looked to take advantage of low rates by raising money in the bond market rather than through bank loans. But Ms. Dukes said that trend appeared to be slowing as interest rates rise.

The same can’t be said of competition from nonbanks, she added.

It’s not the only headwind. Some bankers said in recent interviews that uncertainty over the Trump administration’s tariff policy had forced clients onto the sidelines, particularly those in agriculture and manufacturing, which tend to have bigger capital needs.

And Bill Demchak, CEO of PNC Financial Services Group Inc., said he expects financial technology, or fintech, firms operating online to affect his bank’s small-business lending.

“Fintech has decided to make things very simple for small business and to do it with a very low cost base: They don’t have an army of bankers running all over the place,” Mr. Demchak said in an interview. “In the near term, that has given them a competitive advantage. In the long term, you’ll see us and other banks either partnering with them or replicating what they’re doing.”

Write to Christina Rexrode at christina.rexrode@wsj.com

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