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The State of Small Business Lending

Credit Access during the Recovery and How Technology May Change the Game

Small businesses are core to America’s economic competitiveness. Not only do they employ half of the nation’s private-sector workforce – about 120 million people – but since 1995 they have created approximately two‐thirds of the net new jobs in our country. Yet in recent years, small businesses have been slow to recover from a recession and credit crisis that hit them especially hard. This lag has prompted the question, “Is there a credit gap in small business lending?”.

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This paper compiles and analyzes the current state of access to bank capital for small businesses from the best available sources. We explore both the cyclical impact of the recession on small businesses and access to credit and several structural issues that impede the full recovery of bank credit markets for smaller loans.

One answer may be the emerging, dynamic market of online lenders that are using technology to disrupt the small business lending market. Though small relative to the traditional bank market, these new competitors are providing fast turnaround and online accessibility for customers, and are often using data to create more accurate credit scoring algorithms. Their presence raises many new questions including, who should regulate these new markets? And what will established players do? Finally, if these innovators are the answer to filling the small business credit gap particularly in underserved markets, how do we ensure this does not become the next subprime market?

Small businesses are critical to job creation in the U.S. economy

Small businesses create two out of every three net new jobs, small firms employ half of the private sector workforce, and since 1995 small businesses have created about two out of every three net new jobs—65 percent of total net job creation.

Most small businesses are Main Street businesses or sole proprietorships. Of America’s 28.7 million small businesses, half of all small firms are home-based, and 23 million are sole proprietorships. The remaining 5.7 million small firms have employees and can be divided up into Main Street mom and pop businesses, small‐ and medium‐sized suppliers to larger corporations, and high‐growth startups.