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Small business lending after the financial crisis

A new competitive landscape for community banks

A growing body of research examines how the financial crisis and new regulations have resulted in a consistent decline in small business lending (SBL) by community banks. Beginning in the 1990s, large banks began to increase their market share at the expense of community banks. Ten years or more before the financial crisis, community banks offering standard commercial term loans began to lose their place as the first choice for small businesses seeking credit.

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The financial crisis accelerated these trends, setting the stage for a new post-crisis landscape in credit markets for small firms. In this article, we use Federal Reserve data to demonstrate that before the financial crisis, small businesses were increasingly using real estate as collateral for loans. During the crisis, credit available from community banks was contracted.

Subsequently, as the economy and housing markets began to recover, large banks leveraged technology to compete for smaller commercial borrowers as they searched for lending opportunities in a low-interest-rate and low-return banking environment.

We also examine the rise of alternative and non-bank lenders over the past several years. Most recently, nonbank and alternative lenders have begun to compete with banks by introducing sophisticated technologies and new underwriting methods. These lenders typically issue small business loans electronically, with minimal processing time, across a range of sizes, terms, and borrower risk profiles.

In a new development, nonbank lenders—including payment processors such as PayPal and Square—have begun to harness databases of borrower sales history collected during the processing of payments to offer cash-flow loans and other credit products.