Board of Governors of the Federal Reserve System

Availability of Credit to Small Businesses - October 2022

Preface

Section 2227 of the Economic Growth and Regulatory Paperwork Reduction Act of 1996 requires that, every five years, the Board of Governors of the Federal Reserve System submit a report to the Congress detailing the extent of small business lending by all creditors. The act specifies that the study should identify factors that give policymakers insight into the small business credit market, including the demand for credit by small businesses, the availability of credit, the range of credit options available, the types of credit products used, the credit needs of small businesses, the risks of lending to small businesses, and any other factors that the Board deems appropriate.¹

For previous reports on this topic, see the Board's website at https://www.federalreserve.gov/ publications/availability-of-credit-to-small-businesses.htm.

Executive Summary

This report examines recent patterns in the flows and terms of business credit, credit use by small firms, and the sources of credit provided to small businesses, with an emphasis on the lending activities of commercial banks. Government interventions, such as community reinvestment activities and special governmental policies implemented during the COVID-19 pandemic, are also discussed.

Financial conditions were mostly accommodative between 2018 and 2022, the years covered by this report. Although financial conditions deteriorated in mid-2020 at the onset of the COVID-19 pandemic, they have since returned to pre-pandemic levels for most businesses, reflecting the recovery in economic activity and government initiatives to protect the economy during the downturn.

Background

Defining what is meant by "small business" is the difficult first step in conducting a policy-relevant analysis of the financing needs of small businesses. The financing needs are very different for a "mom and pop" grocery store, a microenterprise in the inner city, a high-tech start-up firm, a business that is ready to expand from early-stage growth to the next level, and a business that has neared the point of issuing public debt or equity. Yet the term "small business" typically encompasses all of these entities. A commonly used definition of a small business is a firm or enterprise with fewer than 500 employees. This definition encompasses nearly all businesses in the United States.

The concerns of Congress and other policymaking bodies about small business financing largely stem from the perception that small firms have more difficulty gaining access to credit than do large businesses or other types of borrowers. The source of this difficulty may be the higher cost of lending to small firms due to greater riskiness or challenges in evaluating and monitoring credit risks, or it may be inefficiencies in markets that hinder pricing of risk or impede the effective pooling of risks. To the extent that private-market impediments or inefficiencies are the source of any difficulties for small business financing, policymakers may focus on measures that mitigate these market failures. It is important to note that no single policy prescription would likely work for all small businesses, and no single definition of small business would be appropriate for all industries. As discussed in this report, credit needs and borrowing sources differ widely among small businesses. In addition, aggregate business finance data broken down by firm size are generally not available. For this report, various proxies are used, including organization type and the size of the debt at the time of origination.

Credit Flows and Terms

The total debt of nonfinancial businesses (for firms of all sizes) grew at an average annual rate of more than 6 percent from 2017 to 2021. As a result, the ratio of nonfinancial business debt to gross domestic product continued to trend up, on average, over this period and remains well above historical norms. Nonfinancial businesses also continued to issue equity at a robust pace, as seen in figure 3, supported by stock prices that rose notably, on net, over the period.²

Total debt of partnerships and proprietorships, of which small businesses represent the majority share, rose at a moderate pace from 2017 to 2021. The two largest components are commercial and residential mortgage debt and loans from commercial banks that are not secured by real estate. Outstanding mortgage debt rose moderately over the past several years, supported by sizable increases in both multifamily residential mortgages and commercial mortgages backed by a range of business property types. In addition, bank loans extended without real estate collateral have grown at a robust pace, reflecting in part the ongoing strengthening of bank balance sheets and a concurrent easing of standards as well as the loans extended under the Paycheck Protection Program (PPP), a program that originated almost $800 billion of forgivable loans to small businesses in 2020 and 2021 in response to the COVID-19 pandemic.

Credit Needs and Use

Despite the important role of small businesses in the U.S. economy, small businesses often have difficulty in gaining access to credit, as lending to small businesses is generally considered riskier and more costly than lending to larger firms. The failure rate in the early years of a business—when the firm is likely to be the smallest—is quite high relative to later years. Additionally, smaller firms fail at a higher rate than larger firms. Lending to small businesses is further complicated by the "informational opacity" of many such firms. The heterogeneity across small firms, together with widely varying uses of borrowed funds and smaller loan sizes, has impeded the development of general standards for assessing applications for small business loans and has made evaluating such loans relatively expensive.

Up-to-date and comprehensive information about the universe of small businesses is sparse, and most evidence about financing needs and sources is derived from surveys. While many of these surveys have limited coverage or rely on nonrepresentative samples, the U.S. Census Bureau has fielded a large-scale, nationally representative annual survey of businesses since 2015. The most recent survey for which data are available, the 2021 Annual Business Survey (ABS), collected information from a random sample of approximately 300,000 firms with paid employees from the universe of private firms with receipts of $1,000 or more.³

Data from the ABS show that, while 60 percent of businesses have less than $50,000 in debt, many businesses have significant levels of debt. At the end of 2020, almost half of businesses reported having less than $5,000 in outstanding debt. An additional 15 percent had at least $5,000 in debt but less than $50,000, while 4 percent had between $500,000 and $999,999 and another 9 percent had at least $1,000,000 in debt.

Small businesses have long used a variety of sources to fulfill their credit needs, both informal and formal. ABS data show that approximately 15 percent of businesses formally applied for new credit in 2020, excluding applications to any pandemic-related programs. Among the businesses that applied for credit, almost 60 percent received the full amount for which they applied, while approximately 12 percent received none.

Providers of Credit

Providers of small business credit include depository institutions—commercial banks, savings institutions, and credit unions—as well as finance companies, nonfinancial firms, and individuals such as family members or friends.

Commercial banks. Lending to small businesses involves unique challenges that banks appear well suited to meet. Of particular significance, information on the financial condition, performance, and prospects of small firms may not be readily available, so, relative to other types of loans, loans to small firms are often based more heavily on information gathered through established relationships than loans for larger businesses.

Overall, small business loans—defined as loans classified as commercial and industrial (C&I) or secured by nonfarm or nonresidential real estate whose original amounts are $1 million or less—and microloans—defined as loans classified as C&I or secured by nonfarm or nonresidential real estate whose original amounts are $100,000 or less—outstanding from commercial banks grew significantly between 2017 and 2020. An important component of the growth in outstanding balances was the PPP. While growth in balances was relatively modest between 2017 and 2019, outstanding balances at the end of 2020—following the implementation of the first round of PPP loans—were 39 percent higher than a year earlier. Outstanding balances on small C&I loans, which include PPP loans, were 70 percent higher. In 2021, balances on all small business loans fell almost 10 percent despite a second round of PPP originations, as almost $600 billion of PPP loans across all lenders were forgiven.

While banks of all sizes are important sources of credit for small businesses, large banks tend to be proportionately less committed than smaller banks to small business lending. As seen in table 10, the average banking organization with $1 billion or less in total assets held over 13 percent of its portfolio as small business loans in June 2021. In contrast, organizations with assets between $1 billion and $10 billion held 10.6 percent of their assets as small business loans, and the largest organizations—those with assets greater than $10 billion—held approximately 6 percent of their assets as such loans. Small business loans play a larger role in the portfolios of small banks than they do in the portfolios of large institutions.

While large banks tend to have a lower ratio of small business loans to assets relative to smaller banks, the leading small business lenders nonetheless typically include the largest banking organizations. Data on industry structure indicate that the leading small business loan holders, where banks are ranked on the basis of total outstanding balances on small business loans, hold a large share of total banking assets and a much smaller share of small business loans.

Savings institutions. Savings institutions, defined as savings banks and savings and loan associations, provide much less credit to small businesses than do commercial banks. The primary lines of business for these institutions, often referred to as thrifts, tend to involve providing retail financial services, such as residential mortgage loans, savings accounts, and negotiable order of withdrawal accounts, to households. As of 2021, savings institutions held $40 billion in small business loans and $7 billion in microloans, compared with $754.5 billion and $227.5 billion, respectively, held by commercial banks.

Credit unions. A credit union is a not-for-profit financial cooperative owned and controlled by its members. While credit unions offer many of the same financial services that banks do, they historically have devoted a smaller share of their assets toward providing small business lending. Outstanding loans to businesses by credit unions increased consistently in recent years; between 2017 and 2021, credit union outstanding loans to business members increased 51.8 percent, although the ratio of outstanding loans to credit union assets was fairly stable over this period.

Finance companies. Businesses use of finance companies peaked in 2018, after which it decreased at an increasing rate (table 16). Dollar volume in 2021 was more than 15 percent lower than in 2017. The primary use of finance companies by businesses is the purchase of motor vehicles or other business equipment, which account for about 80 percent of outstanding business finance company debt.

Online lenders. Online lending generally refers to platforms that bring together potential borrowers and lenders to facilitate the provision of loans. The online lending market has continued to evolve and expand, particularly during the pandemic. According to a recent report from the Cambridge Centre for Alternative Finance, online alternative finance platforms in the United States facilitated more than $15 billion of loans to small and medium enterprises in 2019 (Ziegler et al., 2021).

Government Initiatives to Support Credit Access for Small Businesses

The federal government has historically affected the delivery and availability of credit through a variety of initiatives. Pursuant to the Community Reinvestment Act (CRA), the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve System, and the Office of the Comptroller of the Currency (OCC) evaluate small business lending activities of "regulated financial institutions." In addition, the Small Business Administration (SBA) administers several loan programs that largely focus on the financing needs of small firms that cannot obtain credit elsewhere from conventional sources as well as firms in underserved communities, start-ups, and young firms without much, or any, financial history. In addition to these long-standing initiatives, government entities created several programs and expanded existing programs to support credit access to small businesses during the COVID-19 pandemic. The most prominent of these programs was the PPP, but other supporting programs of note include expansion of the Economic Injury Disaster Loan (EIDL) and the creation of the Paycheck Protection Program Liquidity Facility (PPPLF) and the Main Street Lending Program (MSLP).

Community Reinvestment Act. The Congress enacted the CRA in 1977 to encourage federally insured depository institutions to help meet the credit needs of their local communities, consistent with safe and sound operations. Under the CRA, the banking agencies assess an institution's record of meeting the credit needs of its entire community, including low- and moderate-income neighborhoods. Analysis of CRA data shows that the dollar volume of small business loan originations, as defined under CRA standards, grew steadily between 2010 and 2019.⁴ While steady, however, growth was slow, and, as of 2019, the dollar value of originations was approximately 23 percent below its 2007 high. With the creation of the PPP in response to the COVID-19 pandemic, originations grew almost 80 percent in 2020, surpassing the 2007 high. Originations to businesses with revenues of less than $1 million followed a similar pattern of growth, although the rate of growth in 2020 was notably lower. Small business loan origination volume grew faster in non-LMI areas than LMI areas between 2015 and 2019, while, within each income group, lending grew slightly faster in assessment areas than outside assessment areas through 2019.

Small Business Administration programs. Support for small business development has been a priority of policymakers for several decades, and federal, state, and local agencies have sponsored programs that assist in channeling capital to small businesses. At the federal level, the agency with the most direct role in this objective is the SBA, which the Congress created in 1953 to help entrepreneurs form successful small enterprises. The SBA provides financing to young and growing small firms through several channels such as the 7(a) Guarantee Loan Program and SBA 504 Certified Development Companies (CDCs). Among the small business growth policy objectives of the SBA loan programs is the goal of promoting entrepreneurship opportunities for women and minorities.

Data from SBA lending reports, indicate that, between fiscal years 2016 and 2020, the dollar volume for the 7(a) loans was relatively stable between $23 and $25 billion, while the number of loans declined from 60,000 to 42,000 over that same period. However, fiscal year 2021 saw nearly 52,000 loans originated, totaling $36.5 billion—the largest amount in 7(a) history. While some of the increase in the program may have come from an increased need for small businesses as a result of the COVID-19 pandemic, much of it is likely due to the enhancements made to the program under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) that was signed into law in late December 2020. Funding under the CDC/504 program was generally flat between 2016 and 2019 in both count and dollar volume. Between 2016 and 2019, the number of 504 loans increased from just over 6,000 to nearly 10,000. At the same time, the dollar volume also increased nearly half a billion dollars to $8 billion in 2021.

Small business intervention programs. Important financial support for small businesses throughout the COVID-19 pandemic came in the form of several pieces of legislation providing an unprecedented $968 billion of aid to small businesses. These include the Coronavirus Preparedness and Response Supplemental Appropriations Act; the Coronavirus Aid, Relief, and Economic Security (CARES) Act; the PPP and Healthcare Enhancement Act; the Consolidated Appropriations Act, 2021; and the American Rescue Plan. In addition to the congressional assistance, the Federal Reserve System created two new facilities to further support small business access to credit: the PPPLF and the MSLP.

Flows and Terms of Business Credit

Financial conditions were mostly accommodative between 2018 and 2022, the years covered in this report. Although financial conditions deteriorated in mid-2020 at the onset of the COVID-19 pandemic, they have since returned to pre-pandemic levels for most businesses, reflecting the recovery in economic activity and government initiatives to protect the economy during the downturn. Equity prices rose notably, on net, and interest rates remained low by historical standards. The aggregate debt of all nonfinancial businesses (both large and small) increased moderately, supported especially by robust issuance in the corporate bond and syndicated loan markets.

Aggregate Business Financing

The total debt of nonfinancial businesses (for firms of all sizes) grew at an average annual rate of more than 6 percent from 2017 to 2021 (figure 1).⁵ As a result, the ratio of nonfinancial business debt to gross domestic product continued to trend up, on average, over this period and remains well above historical norms (figure 2).⁶

Nonfinancial businesses also continued to issue equity at a robust pace, supported by stock prices that rose notably, on net, over the period (figure 3). Share repurchases and merger and acquisition activity also remained solid, on average, in part following the passage of the Tax Cuts and Jobs Act of 2017, which reduced the corporate tax rate, and the rebound in corporate earnings after March 2020. As a result, net equity issuance (that is, gross issuance minus retirements) continued to be negative.

Financing for Nonfinancial Corporations

Indicators of financing conditions in the aggregate and for large businesses suggest that conditions were accommodative for most of the period. Financing conditions tightened at the onset of the COVID-19 pandemic but appear to have largely recovered to pre-pandemic levels. Default rates on C&I loans were low to moderate over the entire period. Default rates on nonfinancial bonds spiked over the summer of 2020 but dropped back down to near zero by the end of 2021 (figure 4). Yields on triple-B-rated and high-yield corporate bonds were low by historical standards through the end of 2021, with a small spike late in 2018 due to rising tensions between the United States and China and in the spring of 2020 due to the COVID-19 pandemic (figure 5). However, since early 2022, corporate bond yields across the rating spectrum increased amid rising inflation concerns, tightening in monetary policy, and uncertainty over economic outlook and now stand near the medians of their historical distributions. The spreads of yields on corporate bonds to those on comparable-maturity Treasuries moved in a similar pattern to the yields (figure 6). Borrowing costs for shorter-term debt issued by nonfinancial firms early in the period rose a bit but later declined before picking back up in 2022, as shown in figure 7. Spreads of rates on A2/P2-rated commercial paper over the target federal funds rate were generally stable at low levels, with a spike at the onset of the COVID-19 pandemic (figure 8).

Nonfinancial corporate debt rose steadily from 2017 to 2021 (table 1). Debt growth was supported by a robust pace of bond issuance by nonfinancial corporations, as firms took advantage of the low interest rate environment. Commercial paper outstanding at nonfinancial firms was little changed between 2017 and 2019, but then stepped down in 2020, falling back to its level from 2012. Bank loans not secured by real estate fluctuated a bit over the period, especially after the onset of the COVID–19 pandemic. Commercial mortgage debt rose modestly over this period. Other loans—in particular, leveraged loans from nonbank institutions—grew rapidly.

 

Table 1. Level of debt, 2017–21

Financing for Small Businesses

Fully comprehensive data that directly measure the financing activities of small businesses do not exist. However, various sources of information can serve as proxies and can be used to identify patterns in small business financing. These sources suggest that financing flows to small businesses grew more slowly, on average, than those to large businesses over the past several years.

Total debt of partnerships and proprietorships—of which small businesses represent a significant majority—is largely comprised of bank debt. Figure 9 indicates that partnership and proprietorship debt rose at a moderate pace between 2017 and 2020.⁷ In 2021, there was a large deceleration in bank debt that is directly attributable to loan forgiveness of PPP loans issued in 2020. The PPP is discussed more in depth in box 3 later in this report. The two largest components of total debt are commercial and residential mortgage debt and loans from commercial banks that are not secured by real estate (table 2). Outstanding mortgage debt rose moderately over the past several years, supported by sizable increases in both multifamily residential mortgages and commercial mortgages backed by a range of business property types. In addition, bank loans extendedwithout real estate collateral grew at a robust pace, reflecting in part the ongoing strengthening of bank balance sheets and a concurrent easing of standards as well as the loans extended under the PPP.

Table 2. Level of debt, 2017–21

The amount outstanding on loans to businesses by commercial banks (both with and without real estate collateral) with principals less than or equal to $1 million, which are typically extended to small firms, increased 6.3 percent between 2017 and 2018 and another 2 percent between 2018 and 2019. Between 2019 and 2021, outstanding volumes of these loans grew substantially because of PPP lending. Commercial bank loans with principal amounts less than or equal to $100,000 also saw relatively moderate growth between 2017 and 2019, with a similar PPP-induced bounce between 2019 and 2021.

Evidence suggests that small business credit demand was substantially weakened by the onset of the COVID-19 pandemic but has substantially recovered since then. Some insights into the demand for small business financing can be inferred from small business investment plans as reported in polls conducted by the National Federation of Independent Business (NFIB).⁸ According to the polls, the net percentage of firms with planned capital outlays and the net percentage that anticipated business expansions dropped off substantially by the summer of 2020 (figure 10, panels A and B). While net planned capital expenditures increased some by the end of 2021, net planned business expansions continued to drift sideways, remaining close to the low levels that prevailed for several years after the financial crisis. Data on observed demand for C&I loans, as reported in the Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS), suggest that demand for loans began to recover in mid-2021 (figure 10, panel C).⁹

Regarding credit supply, credit conditions for small business lending were generally accommodative through the first quarter of 2020, after which they tightened substantially. Results from the SLOOS indicate that lending standards for small business borrowers have eased a bit since mid-2021 (figure 11, panel A). The net percentage of respondents to the NFIB reporting that it was somewhat or very difficult to obtain credit was increasing until early 2019, after which it drifted slowly downward and then began to increase in early 2021 (figure 11, panel B). The apparent disconnect between what the banks reported and the firms reported was possibly the result of a combination of the lower share of firms that wanted to borrow money in such an uncertain economic environment and the large amount of fiscal stimulus received by small businesses over this period.¹⁰ In terms of borrowing costs, data from the SLOOS show that the net fraction of banks that report increasing interest rate spreads over costs of banks' funds on loans to small firms increased at the onset of the pandemic (figure 11, panel C). By mid-2021, banks were, on net, reporting narrowing spreads. Responses to other questions in the NFIB polls suggest credit availability is a relatively minor concern for well-established small businesses. In particular, respondents were much more likely to cite weak demand for the products and services they sell, taxes, or government regulations than the availability and cost of credit as the most significant problem they faced at any time since 2002 (figure 12).

Credit Use by Small Businesses

This section examines the composition of small firms and their borrowing behavior. It also discusses the role that small businesses play in the U.S. economy and the unique challenges they face in obtaining credit.

Small Business: Definition and Background

Defining what is meant by small business is the difficult first step in conducting a policy-relevant analysis of the financing needs of small businesses. The financing needs are very different for a "mom and pop" grocery store, a microenterprise in the inner city, a high-tech start-up firm, a business that is ready to expand from early-stage growth to the next higher level, and a business that has neared the point of issuing public debt or equity. Yet the term small businesstypically encompasses all of these entities. A commonly used definition of a small business is a firm or enterprise with fewer than 500 employees.¹¹ This definition encompasses nearly all businesses in the United States.

Data from the U.S. Census Bureau's Business Dynamics Statistics indicate that there were approximately 5.3 million employer firms—that is, firms with at least one paid employee—across 7.2 million establishments, which are defined as individual physical locations where the firm's business was conducted in 2019.¹² The vast majority of these firms were small businesses with 99.6 percent employing fewer than 500 employees, a fraction that is consistent with previous years.¹³

Among these small businesses, more than half employ fewer than 5 employees and about 30 percent employ between 5 and 19 employees (table 3). Fewer than 2 percent of small firms employ more than 100 employees. The employment shares show a higher concentration in larger small businesses.

Table 3. Firm characteristics

Small businesses operate in every major segment of the U.S. economy. The most common industry for small businesses in 2019 was professional, scientific, and technical services, which accounted for almost 13 percent of small firms (table 3). Other services accounted for 12.5 percent of small firms, construction firms accounted for an additional 11.6 percent, the healthcare and social assistance sector accounted for 11.2 percent, and retail trade firms represented another 10.7 percent. The remaining industries all contained fewer than 10 percent of small businesses.

Geographically, small businesses were widely located throughout the nation, with 20.4 percent residing in the Midwest, 19.8 percent in the Northeast, 35.0 percent in the South, and the remaining 24.8 percent in the West. This distribution roughly reflects the 2019 population distribution, as 20.8 percent of the population lived in the Midwest, 17.1 percent in the Northeast, 38.3 percent in the South, and the remaining 23.8 percent in the West (U.S. Census Bureau, Population Division, 2016).

Small businesses play a major role in the U.S. economy. According to the SBA, in addition to accounting for the vast majority of all firms, small businesses account for nearly one-half of private-sector employment, about two-fifths of private-sector payrolls, and roughly one-third of the total export value (U.S. Small Business Administration, Office of Advocacy, 2021).

Risks of Lending to Small Businesses

Despite the important role of small businesses in the U.S. economy, small businesses often have difficulty in gaining access to credit, as lending to small businesses is generally considered riskier and more costly than lending to larger firms. Business Dynamics Statistics data, compiled by the U.S. Census Bureau, provide insights into some of the risks. A couple of important facets of small business dynamics can be observed in table 4, which provides information on the failure rates of firms in 2019—the most recent data available—by the age and employment of the firm.

Table 4. Failure rates of small businesses, 2019

First, the failure rate in the early years of a business—when the firm is likely to be the smallest—is quite high relative to later years. For example, about 20 percent of new businesses failed within the first year of operation in 2019, while less than 6 percent of firms that were at least nine years old failed. Second, smaller firms fail at a higher rate than larger firms. Nearly 12 percent of firms with fewer than 5 employees and 5.1 percent of firms with between 5 and 9 employees failed in 2019, while less than 2 percent of firms with between 100 and 499 employees did so.

Historically, and particularly in the early life of a business, lenders have had difficulty determining the creditworthiness of applicants for small business loans. The heterogeneity across small firms, together with widely varying uses of borrowed funds, has impeded the development of general standards for assessing applications for small business loans and has made evaluating such loans relatively expensive.

Lending to small businesses is further complicated by the "informational opacity" of many such firms. Obtaining reliable information on the creditworthiness of a small business is often difficult because little, if any, public information exists about the performance of most small businesses. Many small businesses also lack detailed balance sheets and other financial information often used by lenders in making underwriting decisions.

The cost to the lender does not end with the decision to grant a loan. Small business lenders typically must monitor the credit arrangement with individual borrowers. For very small firms, a close association between the finances of the business and those of the owner may increase loan-monitoring costs.

Historically, the relatively elevated costs of evaluating small business loan applications and the ongoing costs of monitoring firm performance have made loans to small businesses less attractive for some lenders, especially because, when expressed as a percentage of the (small) dollar amount of the proposed loan, these noninterest costs are often quite high compared with loans to middle-market or large corporate borrowers. Financial institutions, especially commercial banks, are believed to have an advantage in dealing with information problems. By interacting with a firm through its other financial services, such as checking accounts, the lending institution can obtain additional information about the firm's activities, ownership, financial characteristics, and prospects, which are important in deciding whether to extend credit.¹⁴ Lenders can use information gathered over time through long-term relationships with business owners and other members of the local community to monitor the health of the business and to build appropriate incentives into loan agreements.¹⁵ The role of relationship lending will likely continue to be significant, even as developments such as automated banking, credit scoring, and bank consolidation influence the competitive structure of the banking industry.¹⁶

Insights on the risks of lending to small businesses may be gained by examining delinquency rates at banks that primarily make business loans of less than $1 million, which will be referred to as small-business-lending-intensive (SBLI) banks.¹⁷ Figure 13 shows the delinquency rates for C&I loans and loans secured by nonfarm nonresidential properties (NNP) for SBLI banks compared with other banks.¹⁸ Historically, the C&I delinquency rate at SBLI banks has been higher than at other banks. As of 2021, however, this historical relation reversed, potentially because of the combination of the greater participation of SBLI banks in the PPP and the likely very low delinquency rate of PPP loans.¹⁹ Delinquency rates on NNP loans at SBLI banks have declined in recent years, with much of that decline occurring in 2020 and 2021. In contrast, delinquency rates on NNP loans at other banks rose, on net, in 2020 and 2021 and, at the end of 2021, were at levels similar to five years earlier.

Credit Use

Up-to-date and comprehensive information about the universe of small businesses is sparse, and most evidence about financing needs and sources is derived from surveys. While many of these surveys have limited coverage or rely on nonrepresentative samples, the U.S. Census Bureau has fielded a large-scale, nationally representative annual survey of businesses since 2015. The most recent survey for which data are available, the 2021 Annual Business Survey (ABS), surveyed a random sample of approximately 300,000 firms with paid employees from the universe of private firms with receipts of $1,000 or more.²⁰

The survey collects demographic information on up to four individual owners as well as firm-specific information. The owner-specific questions cover information including age, sex, educational attainment, citizenship, ethnicity, race, and veteran status. Firm-specific questions cover a variety of topics, including employment, sales, worker types, customer types, global presence, research and development activities, technology use, management practices, and financing.²¹ At the writing of this report, only preliminary data on financing by owner characteristics for 2020 are available.²²

While the ABS is a large-scale, nationally representative survey of employer businesses, the survey irregularly collects information on financing, and the type of data collected has changed in many respects. Therefore, it can be difficult to draw conclusions from these data on the evolution of credit use of small businesses in recent years. To better understand how credit use changed between 2017 and 2021, see box 1, which discusses data from the Small Business Credit Survey (SBCS), which is an annual, convenience-sampling survey of approximately 6,000 to 11,000 small employer businesses conducted by the Federal Reserve System since 2016.²³

Outstanding Debt

Data from the ABS show that, while 60 percent of businesses have less than $50,000 in debt, many businesses have significant levels of debt (table 5). At the end of 2020, almost half of businesses reported having less than $5,000 in outstanding debt. An additional 15 percent had at least $5,000 in debt but less than $50,000, while 4 percent had between $500,000 and $999,999 and another 9 percent had at least $1,000,000 in debt.²⁴

Table 5. Outstanding debt, by owner demographics, 2020

The table also shows differences in debt levels according to the demographics of the firms' owners.²⁵ For instance, female-owned businesses were a touch more likely to have little to no debt, with about 52 percent of such businesses having less than $5,000 in outstanding debt, compared with male-owned businesses, 46 percent of which had less than $5,000 in debt.²⁶ Male-owned businesses were slightly more likely to have significant levels of debt, with almost 10 percent having $1,000,000 or more in debt compared with just 6 percent of female-owned businesses.

White- and Asian-owned businesses were more likely to have less than $5,000 in debt than businesses owned by members of other races, although Asian-owned businesses were also the most likely to have at least $500,000 in debt.²⁷ Black- and African American–owned businesses were the least likely to have the lowest levels of debt—less than $5,000—but the most likely to have moderate levels of debt—between $10,000 and $99,999. Hispanic-owned businesses were also less likely to have the lowest levels of debt and more likely to have moderate debt levels than non-Hispanic-owned businesses.²⁸

Credit Application Experience

Differences in outstanding debt levels across firms may be attributable to differences in credit demand or to differences in credit supply. While the ABS does not collect information on credit demand and supply over the entire life of small businesses, it did collect information on a measure of demand in the year 2020—whether the business submitted an application for new credit—and information on a measure of supply in 2020—the proportion of requests fulfilled.²⁹

Approximately 15 percent of businesses formally applied for new credit in 2020 (table 6). Among the businesses that did apply for credit, almost 60 percent received the full amount for which they applied, while approximately 12 percent received none.³⁰

Table 6. Credit application experience, 2020

In 2020, a slightly higher fraction of male-owned businesses applied for new credit than women-owned businesses (16 percent compared with 14 percent), and conditional on applying, male-owned businesses more frequently received the full amount for which they applied (60 percent compared with 58 percent). Women-owned businesses, in contrast, more often received none of the credit for which they applied (14 percent compared with 12 percent for male-owned firms).

Asian- and white-owned businesses applied for credit less frequently than other businesses; while approximately 13 percent of Asian-owned businesses and 16 percent of white-owned businesses applied for credit in 2020, more than 20 percent of businesses owned by individuals of other races applied for credit. Sixty-two percent of white-owned businesses were approved for the full amount of credit for which they applied, compared to 38 percent of Black- and African American–owned businesses. Hispanic-owned businesses applied for credit at a slightly higher rate than non-Hispanic-owned businesses—18 percent compared with 15 percent—but received the full amount of credit for which they applied much less often—45 percent compared with 61 percent.

While there are many causes for differences in the rate at which firms were approved for the credit they sought, one important explanation may be the reason for which businesses sought financing. For instance, some businesses use credit to meet operating expenses, while others use credit to expand their business operations. This difference in the use of credit has important implications for the riskiness of lending to the business; the use of credit to expand one's business likely reflects higher current and future profitability than the use of credit to cover operating expenses. As a result, it is reasonable to expect that businesses using credit to finance expansions are approved for credit at higher rates than businesses using credit to meet operating expenses.

The ABS collected information on the reason for seeking financing in 2020, and the pattern of responses suggests that the reason for applying for credit may help explain differences in approval rates across different businesses (table 7).³¹ More than half of businesses that sought financing in 2020 did so to meet operating expenses. Slightly more than 30 percent did so to finance the business's expansion, while 23 percent sought financing to replace or repair existing assets. Finally, 13.5 percent sought new financing to repay existing debt.

Table 7. Purpose of seeking financing, 2020

Businesses that were less often approved for the full amount of credit for which they applied more often reported that the purpose of seeking credit was to meet operating expenses. For instance, 62 percent of female-owned businesses planned to use credit to meet operating expenses compared with 55 percent of male-owned businesses, while 72 percent of Black- and African American–owned businesses sought credit to meet operating expenses compared with 54 percent of white-owned businesses. Similarly, more Hispanic-owned businesses sought credit to pay operating expenses than non-Hispanic-owned businesses.

Sources of Credit

Small businesses have long used a variety of sources to fulfill their credit needs, both informal and formal; common sources of credit include banks and other financial institutions, business owners, family and friends, and outside investors.³² Nevertheless, as data from the ABS show, small businesses remain most reliant on banks for credit, as they overwhelmingly apply to banks more often than any other type of formal lender. Among businesses that applied for new credit in 2020, approximately 68 percent applied to a bank (table 8). The second most common type of lender to which businesses applied in 2020 were finance companies, at 18 percent. Additionally, 7 percent applied to a credit union, 5 percent applied to a fintech or online lender, and 2 percent applied to a community development financial institution (CDFI).³³

Table 8. Lender types applications, 2020

This ranking of lender type generally holds regardless of the demographic characteristics of the owner. Notably, though, Black- and African American–owned businesses applied to a fintech lender about twice as often as white-owned businesses (9 percent compared with 5 percent) and applied almost three times more often to a CDFI (6 percent compared with 2 percent). Similarly, conditional on having applied for credit, Hispanic-owned businesses applied to CDFIs more often than non-Hispanic-owned businesses (4 percent compared with 2 percent).

Providers of Credit to Small Businesses

Providers of small business credit include depository institutions—commercial banks, savings institutions, and credit unions—as well as finance companies, nonfinancial firms, and individuals such as family members or friends.³⁴ Because commercial banks traditionally have been the leading source of credit to small businesses, the analysis focuses primarily on their activities. This section explores the relationship between bank size and small business lending and discusses the concentration of small business lending by commercial banks. This section also presents a more modest analysis of small business lending by savings institutions, credit unions, and some nondepository institutions, which account for substantially less small business credit than commercial banks. Together, these analyses can provide insight into the availability of credit to small businesses.

Survey data highlight the importance of depository institutions to small business credit availability. As discussed previously, data from the 2021 ABS show that, among businesses that applied for new credit in 2020, approximately 68 percent applied to a bank. Similarly, according to the 2019 Survey of Consumer Finances (SCF), 68 percent of households that owned small businesses indicated that the primary institution for their business was a commercial bank, which is down from 73 percent in 2016.³⁵ Sources other than depository institutions are a smaller but important source of credit for small businesses; for instance, data from the 2021 ABS show that 18 percent of small businesses that sought credit in 2020 applied to a finance company. For a discussion of the sources of small business credit in the SBCS, see box 2.

Beyond survey data, an important source of information on the small business lending activities of commercial banks and savings institutions is the small business loan data collected by the Federal Reserve and other regulatory agencies on the Consolidated Reports of Condition and Income (Call Reports).³⁶ These data, which have been collected since June 1993, include information on outstanding small C&I loans and loans secured by nonfarm nonresidential properties.³⁷ The number of loans and amount outstanding are collected for loans with original amounts of $100,000 or less, more than $100,000 but less than $250,000, and more than $250,000 but less than $1 million.³⁸

These data are used to estimate the amount of credit extended to small firms. Because firm characteristics are not reported on Call Reports, loan size is often used as a proxy for the size of the firm receiving credit. However, this approach to measuring small business lending introduces two sources of inaccuracy in the number and dollar amount of loans to small businesses. First, the data likely include loans equal to or less than $1 million extended to large firms, and second, the data exclude loans of more than $1 million made to small firms.³⁹ Recent analysis of the 2016 collection of the Small Business Lending Survey, a nationally representative survey of banks sponsored by the FDIC and implemented by the U.S. Census, suggests that this proxy may—on net—understate small business lending by banks with $1 billion to $10 billion in assets by up to 23 percentage points (Goldston and Lee, 2020). According to data from this set of Community Reinvestment Act (CRA) reporters, a little more than one-third of the dollar volume of loans with initial values of less than $1 million is directed to firms with revenues of less than $1 million. This volume is likely to be an understatement because many reporters do not collect or submit information on the revenues of the firms to which they lend. This result does indicate, however, that a significant portion of loans included in the less than $1 million category are made to larger businesses.

Lending by Depository Institutions

Commercial Banks

Commercial banks are important providers of credit to small firms.⁴⁰ Lending to small businesses involves unique challenges that banks appear particularly well suited to meet. Of particular significance, information on the financial condition, performance, and prospects of small firms may not be readily available, so, relative to other types of loans, loans to small firms are often based more heavily on information gathered through established relationships than loans for larger businesses, as explained in the section Risks of Lending to Small Businesses. Commercial banks continue to maintain local branch networks, which aid them in nurturing relationships and gathering firm-specific information. Commercial banks also provide credit to small businesses through business credit cards, which rely on business or consumer credit ratings rather than established relationships. However, the bank size, industry structure, and concentration of the local banking markets play a role in the interaction of different banks in different markets with small businesses. These differences will be discussed below.

Aggregate Small Business Lending

Overall, small business loans—defined as loans classified as commercial and industrial (C&I) or secured by nonfarm or nonresidential real estate whose original amounts are $1 million or less—and microloans—defined as loans classified as C&I or secured by nonfarm or nonresidential real estate whose original amounts are $100,000 or less—outstanding from commercial banks grew significantly between 2017 and 2020 (table 9). An important component of the growth in outstanding balances was the PPP .⁴¹ While growth in balances was relatively modest between 2017 and 2019, outstanding balances at the end of 2020, following the implementation of the first round of PPP loans, were 39.0 percent higher than a year earlier. Outstanding balances on small C&I loans, which include PPP loans, were 70 percent higher. In 2021, balances on all small business loans fell almost 10 percent despite a second round of PPP originations, as almost $600 billion of PPP loans across all lenders were forgiven. In contrast, outstanding balances on NNP loans shrank every year, continuing a trend that began in 2010.

Table 9. Small business loan and microloan holdings of U.S. commercial banking organizations, by type of loan, 2017–21

Bank Size

While banks of all sizes are important sources of credit for small businesses, large banks tend to lend a smaller share of their total assets to small businesses than smaller banks. As seen in table 10, the average banking organization with $1 billion or less in total assets held over 13 percent of its portfolio as small business loans in June 2021. In contrast, organizations with assets between $1 billion and $10 billion held 10.6 percent of their assets as small business loans, and the largest organizations—those with assets greater than $10 billion—held approximately 6 percent of their assets as such loans. Small business loans represent a larger percentage of the portfolios of small banks than they do of the portfolios of large institutions.

Table 10. Average microloan and small business loan holdings as a share of assets for U.S. commercial banking organizations of different sizes, 2021

The pattern for holdings of microloans, which are defined as business loans of $100,000 or less, is even stronger, with smaller banks maintaining an even larger share of their asset portfolios in such loans when compared with larger banks. While about 4 percent of the loan portfolio of the smallest banks is in small business microloans, this figure is about 1.6 percent for banks larger than $1 billion in assets.

The smallest banks tend to hold proportionately more of the smallest business loans for two primary reasons. First, many small banks specialize in providing banking services to a particular local area. As a result, these banks are likely to accumulate knowledge of their local markets, which is often important in making risky, relationship-dependent small business loans. Difficulties in evaluating and monitoring loans likely become more severe as firms, and therefore loans, decrease in size. Second, bank regulations limit the amount that a bank can lend to a single borrower to 25 percent of the bank's capital; by definition, small banks are limited by their assets in their ability to make very large loans. Small banks can also maintain a more diversified portfolio by making many smaller loans, rather than fewer larger loans.

Between 2017 and 2021 the overall volumes of small business loans and of microloans increased by 9.1 percent and 16.7 percent, respectively (table 11). However, for the smallest of the four size classes of banks—those with less than $250 million in assets—small business loans and microloans decreased. However, the decline in small business lending for these small banks was slower than the decline in total lending. The three larger size classes of banks saw positive growth in small business loans as well as microloans, although banks with between $250 million and $1 billion in assets saw a slight decline in total small business lending. Much of this growth is likely attributable to PPP loans that still remained on bank balance sheets at the end of 2021, with the growth in volumes in these loan types, exclusive of PPP loans, likely much lower.

Table 11. Growth of small business loan and microloan holdings of U.S. commercial banking organizations, by asset class, 2017–21

While the ratio of microloans to assets remains lower at larger banks than at small banks, outstanding balances in microloans have grown faster in recent years at larger banks, reflecting the increasing role of large banking organizations in providing the smallest loans.⁴² Increased use of sophisticated technological and analytical tools, particularly credit-scoring techniques, has likely contributed to the rise in the share of microloans held and originated by large banking organizations. The largest banks may also have expertise in credit card programs and may have leveraged this experience to provide business credit cards that typically have low balances (Brevoort and Hannan, 2006).

Industry Structure

While large banks tend to have a lower ratio of small business loans to assets relative to smaller banks, the small business lenders with the largest volumes nonetheless typically include the largest banking organizations.

Data on industry structure in table 12 indicate that the top small business loan holders, where banks are ranked on the basis of total outstanding balances on small business loans, hold a large share of total banking assets and a much smaller share of small business loans. For instance, in 2021, the 10 largest holders of small business loans held 53.9 percent of all banking assets. The role of these banks in small business lending was notably smaller, as they held 25.2 percent of all small business loans. Similar differences between the share of small business loans and the share of total assets are observed among the 25, 50, and 100 largest small business loan holders.

Table 12. Share of assets and microloan and small business loan holdings of leading U.S. commercial banking organizations, 2017 and 2021

These data also show that the shares of small business loans held by the largest small business lenders increased a bit since 2017. The 100 small business bank lenders with the highest total outstanding balances on small business loans accounted for just over one-half of the outstanding small business loans and about five-sixths of total assets in both 2017 and 2021. Microloan lending became slightly more concentrated, with the top 100 most active small business bank lenders accounting for more than 78 percent of microloans in 2021, up from slightly less than 77 percent in 2017.

This pattern has implications for the availability of bank credit to small businesses. First, because the share of small business lending activity attributable to the 100 most active lenders is smaller than their share of total assets, other lenders remain a key source of credit for small firms. Second, although the share of small business lending attributable to the top banks has increased, there has not been significant industry consolidation resulting in relatively few large banking organizations being the dominant providers of credit to small businesses.

Local Market Concentration

While the relationship between bank size and small business lending activity suggests that the industry-level structure is an important factor in the provision of credit to small businesses, the proximity of the bank and the small business also seems to be important. For instance, data from the 2019 SCF show that, among households that report owning businesses with fewer than 500 employees, the median distance to their firm's primary financial institution was four miles.

Conventional economic theory predicts, and empirical evidence suggests, that highly concentrated markets exhibit less competition, which results in higher prices and the provision of less credit. Some theories, however, predict that a less competitive lending environment may increase credit availability to at least some firms by allowing local banks more flexibility in structuring loan programs over time to promote longer-term relationships (for example, Petersen and Rajan, 1995). Long-term relationships, which facilitate loans to many small businesses in a process often referred to as relationship lending, may be more difficult to maintain in highly competitive markets because businesses that are earning good profits will likely seek out the lender offering the most favorable, low-cost loan terms.

Therefore, the structure of the local banking market is particularly important because changes in concentration could affect the level of competition for small business lending, which, in turn, could influence the cost of borrowing and the quantity of credit demanded. Therefore, to address some key issues associated with the availability of credit to small businesses, one must shift the analysis from lending at the industry level to the local level. Analysis of bank structure within smaller geographic areas is likely to capture more accurately the relevant market conditions that small firms face when seeking credit and that influence competition in the market for small business loans.

Data from the annual Summary of Deposits—which reports the location and deposit level of every commercial bank, savings bank, and savings and loan branch as of June 30—are used to examine bank market structure and competition in local areas.⁴³ The primary measure used by antitrust authorities to assess market concentration is the deposit-based Herfindahl-Hirschman Index (HHI), which is computed as the sum of the squared market shares (that is, the shares of total deposits) of each firm in a market. These measures are shown in table 13, along with information on the number of banks and banking offices.⁴⁴ The data show that in 2021, about 24 banks provided banking services in the average metropolitan statistical area (MSA). The average level of the HHI with 50 percent weighting of savings institution deposits was 1,668, a level considered to reflect a moderately concentrated market.⁴⁵ In micropolitan areas, there was an average of approximately 8.5 banks providing services, with an average HHI with 50 percent weighting of savings institution deposits of 2,476. Rural areas—defined as counties not located in either metropolitan or micropolitan areas—are much more highly concentrated with respect to their deposits and, on average, have fewer banks and banking offices. In 2016, the average rural market had about 4 banks, and the average rural market HHI with 50 percent weighting of savings institution deposits was 4,437.

Table 13. Average structural measures of U.S. commercial banking and thrift organizations, by metropolitan statistical area, micropolitan area, and rural county, 2012–21

Savings Institutions

Savings institutions, defined as savings banks and savings and loan associations, provide much less credit to small businesses than do commercial banks. The primary lines of business for these institutions, often referred to as thrifts, tend to involve providing retail financial services, such as residential mortgage loans, savings accounts, and negotiable order of withdrawal accounts, to households.⁴⁶ As of June 30, 2021, there were 4,019 commercial banking organizations and 569 thrifts (tables 10 and 14). Savings institutions held $40 billion in small business loans and $7.0 billion in microloans, compared with $754.5 billion and $227.5 billion, respectively, held by commercial banks.

These differences between commercial banks and savings institutions reflect not only the disparity in overall size between the two groups of institutions, but also a lower proportion of small business lending conducted by the typical savings institution. In terms of overall size, in 2021, roughly $20.6 trillion in total domestic assets were held by commercial banks and savings institutions, with the latter holding about 7 percent of the total, or $1.4 trillion. In terms of small business lending intensity, the average thrift held roughly 8.1 percent of its asset portfolio in small business loans and 1.4 percent in microloans in 2021 (table 14). In contrast, the average commercial bank held 12.8 percent of its portfolio in small business loans and 3.1 percent in microloans (table 10). These differences in small business lending activity between banks and thrifts indicate that the typical savings institution has been much less active than the typical commercial bank in providing credit to small firms.

Table 14. Average microloan and small business loan holdings as a share of assets for U.S. savings institutions and thrifts of different sizes, 2021

Credit Unions

A credit union is a not-for-profit financial cooperative owned and controlled by the people who use its services. While credit unions offer many of the same financial services that banks do, they historically have devoted a smaller share of their assets toward providing credit to small businesses.⁴⁷ Outstanding loans to businesses by credit unions increased consistently in recent years; between 2017 and 2021, credit union outstanding loans to business members increased 51.8 percent, although the ratio of outstanding loans to credit union assets was fairly stable over this period (table 15).⁴⁸

Table 15. Business loan holdings of federally insured U.S. credit unions, 2017–21

Lending by Nondepository Sources

In this changing financial marketplace, small businesses have been diversifying their providers of financial services. Recently, small firms are turning to alternative nondepository sources for credit products. While current data are not available on the share of firms that use nondepository institutions, older survey results indicate the shares are rising. While the fraction of total outstanding dollars in this category is likely relatively small, the fact that it is increasing may indicate a growing appetite for this type of funding. Although there is an ever-growing number of nondepository sources of financing, data are scarce. This section briefly discusses finance company lending, venture capital funding, and online nondepository lending to small businesses.

Finance Companies

Businesses' use of finance companies peaked in 2018, after which it decreased at an increasing rate (table 16). Dollar volume in 2021 was more than 15 percent lower than in 2017. The primary use of finance companies by businesses is the purchase of motor vehicles or other business equipment, which account for about 80 percent of outstanding business finance company debt. While lending in both of these subcategories followed the overall trend for finance companies, lending for motor vehicles dropped much more substantially, as motor vehicle sales fell throughout the COVID-19 pandemic. In 2021, finance company lending for motor vehicles was more than 35 percent lower than in 2017. Other business receivables fell about 18 percent over the period. It is important to note that it is not possible to separate the data according to the size of the business, but, if one assumes that the trends broadly hold for both large and small businesses, it would appear that lending to small businesses by finance companies likely decreased over the most recent period.

Table 16. Outstanding loans to businesses by finance companies, 2017–21

Online Lending to Small Businesses

The development of fintech has enabled small businesses to access credit in ways previously unavailable to them. Specifically, online lenders (also referred to as "fintech lenders") provide technology-based platforms for matching borrowers and investors. These platforms leverage their web-based and data-driven technologies to provide consumer and business credit products.⁴⁹

Online lending generally refers to platforms that bring together potential borrowers and lenders to facilitate the provision of loans. An online lender can be broadly characterized as a nonbank entity that uses technology to simplify the loan process—including the application, decision process, funds distribution, and loan repayment—and operates as a two-sided market of consumers and investors. Along with interest, the borrower is typically charged a fee to originate the loan, and investors pay for servicing the loans. In general, marketplace lenders offer uncollateralized low-dollar loans with rapid decision times. The loans are typically funded and repaid via electronic transfers, with the lender and borrower never meeting in person.

The online lending market has continued to evolve and expand, particularly during the pandemic. According to a recent report from the Cambridge Centre for Alternative Finance, online alternative finance platforms in the United States facilitated more than $15 billion of loans to small and medium enterprises in 2019 (Ziegler et al., 2021).⁵⁰ While this amount remains small relative to the small business credit market as a whole—for reference, outstanding small loans to businesses on bank balance sheets in 2019:Q4 was $607 billion—this market has grown rapidly from less than $10 billion in 2016. In addition, fintech lenders are estimated to have provided nearly 8 percent of PPP loan dollars and 22 percent of PPP loans to small businesses during the COVID-19 pandemic.⁵¹

Government Initiatives to Support Credit Access for Small Businesses

This section examines the role of government programs in supporting credit for small businesses. The federal government has historically affected the delivery and availability of credit through initiatives such as the CRA and several loan programs sponsored by the SBA, which largely focus on the financing needs of small firms in underserved communities and of young firms without much, or any, financial history. In addition to these long-standing initiatives, government entities created several programs and expanded existing programs to support credit access to small businesses during the COVID-19 pandemic. The most prominent of these programs was the PPP, but other supporting programs of note include expansion of the EIDL and the creation of the PPPLF and the MSLP.

Community Reinvestment Act

The Congress enacted the CRA in 1977 to encourage federally insured depository institutions to help meet the credit needs of their local communities consistent with safe and sound operations.⁵² Under CRA, the FDIC, FRS, and OCC assess an institution's record of meeting the credit needs of its entire community, including low- and moderate-income (LMI) neighborhoods.⁵³

Under existing CRA standards, CRA assessment areas are generally identified as the areas where banking institutions have their main offices, branches, and deposit-taking ATMs. LMI neighborhoods have been defined for regulatory purposes as census tracts with a median family income of less than 80 percent of the median family income of the broader area according to Census data.⁵⁴ As of the publication of this report, the agencies are undertaking an effort to strengthen and modernize the regulations implementing the CRA with respect to the evaluation of small business lending under CRA.⁵⁵

Under CRA regulations, the bank regulatory agencies regularly review institutions' lending patterns and prepare publicly available written evaluations, which include ratings. The CRA requires that supervisory agencies consider a financial institution's CRA performance when evaluating applications for, among other things, expansion or relocation of depository facilities through branching, mergers, or acquisitions. Decisions on these applications are made public.

One type of community reinvestment intermediary used by banks to help finance small businesses in lower-income areas is the bank-owned or bank-affiliated community development corporation. Under certain conditions, bank holding companies, national- and state-chartered commercial banks, and savings institutions may make equity investments in small businesses through a community development corporation or a limited liability company. Generally, these entities can make debt and equity investments in small businesses when the firms are located in LMI areas and the jobs created and services provided benefit primarily LMI persons.

Another form of intermediary is a consortium lending organization that specializes in financing young or start-up small and minority businesses. By participating in such consortiums, banks can mitigate the risks and costs of lending to small firms. These loan consortiums are usually organized in corporate form and may be nonprofit or for-profit organizations. Although many are organized primarily by banks, they often have nonbank participants such as insurance companies, utilities, other corporations, religious institutions, and other institutional investors. Other loan consortiums are quasi-public arms of state, regional governments, or local governments.

Because many institutions do not have the expertise or cannot bear the development costs of special small business finance programs, especially those focusing on reinvestment areas, many banks have created or assisted intermediaries that support small businesses in their communities. Indeed, a notable development in bank reinvestment programs has been formal and informal working partnerships among banks, regional or neighborhood nonprofit organizations, and community-based development corporations. These organizations identify prospective borrowers, provide loan counseling, serve as experienced developers in low-income and minority areas, and assist banks in marketing loan programs. These types of partnerships have also been effective in helping reduce the high transaction costs often associated with lending to very small firms. Such organizations also frequently package financial resources for small firms from several public and private sources. Overall, these types of partnerships enable banks to make small business loans that might not otherwise have been financially feasible.

Community Reinvestment Act Data on Lending in Lower-Income and Minority Neighborhoods

CRA regulations require larger commercial banks and savings associations to collect and report data regarding the geographic location of their small business lending. As a consequence of amendments to CRA regulations in 2005, as of January 1, 2022, banking institutions with assets of less than $1.384 billion as of December 31 in each of the two previous years are not required to report data on their small business and small farm lending.⁵⁶ However, many smaller institutions still elect to report these data.⁵⁷ Analysis of Call Report data indicates that lenders reporting CRA data account for approximately three-fourths of the dollar volume of small business loans outstanding at all commercial banks and savings associations.

Each reporting bank submits an annual report on the total number and dollar volume of small business loan originations by census tract. As in the Call Report data, small business loans encompass C&I loans and NNP loans whose original amounts are $1 million or less. However, unlike the Call Report data, CRA data provide information on originations, or the flow, of small business credit rather than the stock of outstanding loan balances.⁵⁸ CRA data also provide information on the number and dollar volume of small business loans originated to businesses with revenues of less than $1 million, to the extent that the reporting institution collects such information when making credit decisions.

Figure 14, panel A, shows that the dollar volume of small business loan originations grew steadily between 2010 and 2019. While steady, however, growth was slow, and, as of 2019, the dollar value of originations was approximately 23 percent below its 2007 high. With the creation of the PPP in response to the COVID-19 pandemic, originations grew almost 80 percent in 2020, surpassing the 2007 high. Originations to businesses with revenues of less than $1 million followed a similar pattern of growth, although the rate of growth in 2020 was notably lower.⁵⁹

Figure 14, panel B, disaggregates these two series by whether loans were made in LMI neighborhoods and whether loans were made in a bank's CRA assessment area (see previous section for definitions of LMI and assessment areas). Small business loan origination volume grew faster in non-LMI areas than LMI areas between 2015 and 2019, while, within each income group, lending grew slightly faster in assessment areas than outside of assessment areas through 2019. For instance, among LMI areas, origination volumes inside assessment areas were 7 percent higher in 2019 than in 2015, while volumes outside assessment areas were less than 1 percent higher. Finally, growth in 2020 was notably higher inside assessment areas.

Figure 14, panel C, displays the trend in lending across neighborhoods with higher (at least 30 percent) and lower (less than 30 percent) shares of minority residents. Between 2015 and 2019, higher-minority-share neighborhoods experienced slightly higher growth in origination volume. Relative to 2015, origination amounts in higher-minority-share neighborhoods were 11 percent higher in 2019, while they were approximately 7 percent higher in lower-minority-share neighborhoods in 2019. Originations for 2020, however, showed significantly stronger growth in lower-minority-share neighborhoods. As a result, originations in 2020 for these neighborhoods were 116 percent higher than in 2019, compared with 60 percent higher for higher-minority-share neighborhoods.

Table 17 provides additional data on small business lending in LMI versus non-LMI neighborhoods as well as inside versus outside of CRA assessment areas. The top panel shows data for 2015, while the bottom panel shows data for 2020. Comparing across columns, the volume of lending is considerably higher in non-LMI neighborhoods than in LMI neighborhoods in both years, reflecting, at least in part, that roughly three-fourths of the population resides in non-LMI neighborhoods. Within each income group, assessment area lending exceeds non-assessment area lending in dollar terms in both years.

Table 17. Small business lending, by neighborhood income and assessment area status, 2015 and 2020

The role of credit card lending institutions is notably smaller in 2020 than in 2015.⁶⁰ Whereas credit card lenders accounted for slightly more than 20 percent of total lending in dollar terms in 2015, they accounted for a little more than 10 percent in 2020. This decline appears to be, at least in part, because of the relatively lower participation of credit card banks in the PPP than of other banks.⁶¹ However, these institutions, which generally do not have an extensive network of bank branches and therefore have limited CRA assessment areas, did account for a significantly higher share of lending outside of assessment areas than in assessment areas in both years. Comparing LMI with non-LMI areas, table 17 indicates that credit card lenders made up a larger share of loan origination volume in non-LMI areas than in LMI areas in both 2015 (21.9 percent versus 19.0 percent) and 2020 (10.2 percent versus 9.0 percent).

Finally, table 17 also shows the share of small business lending by banks in the top 10 banking organizations according to total assets, by neighborhood income group. These data reveal that the top 10 organizations accounted for just under 30 percent of dollars loaned in both LMI and non-LMI neighborhoods in both 2015 and 2020.⁶²

Small Business Administration Programs

Support for small business development has been a priority of policymakers for several decades, and federal, state, and local agencies have sponsored programs that assist in channeling capital to small business. At the federal level, the agency with the most direct role in this objective is the SBA, which the Congress created in 1953 to help entrepreneurs form successful small enterprises. The SBA provides financing to young and growing small firms through several channels such as the 7(a) Guarantee Loan Program, SBA 504 Certified Development Companies (CDCs), and the Micro Loan Program. Among the policy objectives of the SBA loan programs is the goal of promoting entrepreneurship opportunities for women and minorities.

SBA 7(a) Guarantee Loan Program

The largest SBA program is the 7(a) Loan Program, which provides lenders with a partial loan guarantee for extending credit to small businesses that meet the SBA's underwriting and eligibility criteria. Participating lenders agree to structure loans according to the SBA's requirements that ensure reasonable rates and terms, and they apply for and receive a guarantee from the SBA on a portion of this loan. The SBA does not fully guarantee 7(a) loans—the lender and the SBA share the risk that a borrower will not be able to repay the loan in full. In regular times, the SBA provides a guarantee of as much as 85 percent for loans less than or equal to $150,000 and a guarantee of as much as 75 percent for loans greater than $150,000. The maximum loan amount is $5 million, increased in 2010 from $2 million under the Small Business Jobs Act of 2010. However, under the SBA Express loan program, which requires less loan documentation and provides a quicker turnaround time, only 50 percent of the loan is guaranteed, and the maximum loan amount is $500,000.

Figure 15, panel A, shows that between fiscal years 2016 and 2020, the dollar volume for the 7(a) loans was relatively stable between $23 and $25 billion, while the number of loans declined from 60,000 to 42,000 over that same period. However, fiscal year 2021 saw nearly 52,000 loans originated, totaling $36.5 billion—the largest amount in 7(a) history. While some of the increase in the program may have come from an increased need by small businesses as a result of the COVID-19 pandemic, much of it is likely due to the enhancements made to the program under the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (Economic Aid Act) that was signed into law late December 2020. The Economic Aid Act temporarily increased the SBA guarantee on 7(a) loans to 90 percent for loans made between December 27, 2020, and September 30, 2021; waived some fees; and waived debt and interest payments of up to $9,000 per month on eligible loans for up to six months.

Figure 15, panel B, shows time trends in the fraction of 7(a) loan dollars reported to have gone to minority- and women-owned businesses as well as the fraction of loans below $150,000, which qualify for a larger percentage guarantee and are more likely to have gone to smaller businesses. The share of dollars to women-owned businesses fell over the period, from near 30 percent in 2016 to 26 percent in 2020. The share of dollars to minority-owned businesses increased between 2016 and 2019 before dropping off in 2020 and rebounding in 2021. This panel also shows that the fraction of dollars originated in loans of less than $150,000 has dropped from 9 percent in 2016 to 3 percent in 2021.

SBA 504 Certified Development Companies

Banks often work with CDCs to leverage funds for small business financing. CDCs are generally nonprofit corporations specializing in small business finance and are certified by the SBA to participate in the agency's section 504 financing program. The SBA 504 program is intended to help small businesses expand and to create jobs by providing CDCs with the ability to issue SBA-guaranteed long-term debentures to fund small firms' purchases of plant, equipment, or real estate. Since 2015, 504 loans may also be used to refinance conventional (non-SBA) debt rather than for expansion or job creation. These loans are typically structured with three components: (1) a first mortgage or lien, which is made by a private commercial lender for 50 percent of the total project and does not come with a government guarantee; (2) a second mortgage or lien, which is made by a CDC for 40 percent of the total project and is backed by a 100 percent SBA-guaranteed debenture; and (3) borrower equity for the remaining 10 percent of the total project.

Figure 16, panel A, shows that funding under the 504 program was generally flat between 2016 and 2019 in both count and dollar volume. Between 2019 and 2021, the number of 504 loans increased from just over 6,000 to nearly 10,000. At the same time, the dollar volume also increased from $5 billion in 2019 to $8 billion in 2021. Panel B shows that the share of 504 loans issued to female-owned businesses went from 15 percent in 2016 to 29 percent in 2021. The share of loans to minorities generally decreased over the period, from 27 percent in 2016 to 23 percent in 2021. The share of 504 loans under $2 million has held steady over the period, accounting for about two-thirds of 504 loans.

Special Small Business Intervention Programs during the COVID-19 Pandemic

Important financial support for small businesses throughout the COVID-19 pandemic came in the form of several pieces of legislation providing an unprecedented $968 billion of aid to small businesses.⁶³ These include the Coronavirus Preparedness and Response Supplemental Appropriations Act and the Coronavirus Aid, Relief, and Economic Security (CARES) Act; the PPP and Health Care Enhancement Act; the Consolidated Appropriations Act of 2021; and the American Rescue Plan. In addition to the congressional assistance, the Federal Reserve System created new facilities to support the flow of credit to households and businesses. Two programs were specifically targeted to support small business access to credit: the PPPLF and the MSLP.

The Coronavirus Aid, Relief, and Economic Security Act

The CARES Act was enacted on March 27, 2020, to address the near-term economic effect the virus is having on families and businesses. This nearly $4 trillion relief package earmarked $380 billion to help small businesses. The largest component ($349 billion) was for the creation of the PPP, which provided forgivable loans to small businesses to help them avoid laying off their workers. The loans were intended to be forgiven if the business demonstrated it had spent the money on payroll, rent, utilities, or other allowable expenses. A more detailed description of the PPP is included in box 3.

Paycheck Protection Program and Health Care Enhancement Act

On April 24, 2020, the PPP and Health Care Enhancement Act was enacted. That bill, totaling $483 billion, provided an additional $383 billion in economic support for small businesses.⁶⁴ The majority of this funding ($321 billion) was allocated to replenish the PPP, which exhausted its initial funding within two weeks because of overwhelming demand.

Consolidated Appropriations Act of 2021

The $868 billion Consolidated Appropriations Act, enacted on December 27, 2020, included an additional $302 billion for small businesses. The bill provided funding for additional PPP loans—including second-draw loans for firms that had already exhausted their first-draw loan—as well as EIDL grants, the Shuttered Venue Operators Grant (SVOG) program, and enhancements to other SBA lending programs.

American Rescue Plan

The American Rescue Plan, which was enacted on March 11, 2021, provided an additional $1.9 trillion of federal relief in a variety of areas. For small businesses, the bill allocated $59 billion in targeted aid. In addition to providing further funding for the PPP, the SVOG, and EIDL, it allocated $28.6 billion for the Restaurant Revitalization Fund—which issued grants equal to pandemic-related revenue losses, up to certain thresholds, to restaurants and other eligible businesses—and the State Small Business Credit Initiative, which provided up to $10 billion to be matched by private funding over the next 10 years.

Paycheck Protection Program Liquidity Facility

To bolster the ability of banks to extend PPP loans, the Federal Reserve established the PPPLF. The facility allowed PPP lenders to pledge their PPP loans as collateral for advances from the Federal Reserve. The facility was launched April 16, 2020. To expand the reach of the PPPLF, on April 30, 2020, the FRB opened the facility to certain types of PPP lenders that are nondepository institutions including community development financial institutions (CDFIs), small business lending companies licensed by the SBA, and some financial technology firms. By the end of August 2020 when the first round of PPP was completed, the facility had issued $68 billion in loans.⁶⁵ When additional PPP funding was added in 2021, the PPPLF once again provided liquidity to lenders. At the end of June 2021, the PPPLF had issued more than $90 billion. Research finds that, on average, commercial banks that used the PPPLF extended over twice as many PPP loans, relative to their total assets, as banks that did not use the PPPLF (Anbil, Carlson, and Styczynski, 2021).

Main Street Lending Program

On April 9, 2020, the MSLP was established by the Federal Reserve System to support small- and medium-sized businesses and nonprofit employers affected by the COVID-19 pandemic.⁶⁶ The program made available $600 billion in loan facilities to employers who must have been in good financial standing before the onset of the COVID-19 pandemic. To relieve bank balance sheet constraints and allows banks to make more loans in an uncertain environment, the Federal Reserve bought 95 percent of new or existing loans to qualified employers, while the issuing bank retained 5 percent of each loan. In exchange for the loan, employers must have made reasonable efforts to maintain payroll and retain workers. In total, the MSLP purchased $17.5 billion in business loans.

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Footnotes