The survival and growth of small businesses depends on access to credit, and banks are the most common source of external credit for small firms. Banks are able to provide this degree of financing because they have a special ability to identify creditworthy small businesses that often lack verifiable evidence of their quality. Yet, despite the importance of banks to small businesses and the importance of small businesses to the larger economy, very little comprehensive information is available about small business lending by banks. In particular, evidence is scarce about how banks define small business lending, what approaches they take to meet the needs of these customers, and whether small banks and large banks approach small business lending in significantly different ways.
The need for such information is important given the trends in the banking industry since the Great Recession. One such trend is consolidation: between 2008 and 2017 the number of small banks in the country dropped by nearly a third and small-bank assets dropped by more than 14 percent, whereas large banks increased their assets by 13 percent (in this report, small banks are defined as those with under $10 billion in assets, and large banks as those with at least $10 billion in assets). Even so, at the end of 2017 small banks, though holding only 17 percent of banking assets, held nearly 53 percent of small loans to businesses (according to the Call Report measure for small business lending).5 Another trend is the decline in the number of bank branches. In 2017 there were nearly 10 percent fewer branches in operation—for all sizes of banks—than there had been in 2008.