In 2014, small businesses were still struggling to recover, prompting our first HBS Working Paper: “The State of Small Business Lending: Access to Credit During the Recovery and How Technology May Change the Game,” which focused on a then-controversial question: “Is there a credit gap in small business lending?”.
One answer became clear: a gap in access to credit for small businesses did exist and was particularly persistent in small-dollar loans—those defined as under $250,000.This finding is noteworthy, as this is the level of loan that most small businesses want; more than 70 percent of small businesses seek loans in amounts under $250,000, and more than 60 percent want loans under $100,000.
Not surprisingly, this was exactly the market targeted by a new set of lenders. Entrepreneurs and innovators saw the opportunity, and over the last several years have created an emerging, dynamic market of online lenders that use technology to disrupt the small business lending market. Though still small relative to the traditional bank market, these new competitors provide fast turnaround and online accessibility for customers and use new data and credit scoring algorithms.