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The State of Small Business Lending 2016

The State of Small Business Lending

Innovation and Technology and the Implications for Regulation

Small businesses are core to America’s economic competitiveness. Not only do they employ half of the nation’s private sector workforce – about 62 million people – but since 1995 they have created approximately 60 percent of thenet new jobs in our country. Small businesses were hit especially hard by the Great Recession, accounting for over 60 percent of the total jobslost, in part because the crisis was centered on the banking sector. Credit oriented crises are known to have a disproportionate effect on credit dependent entities such as small businesses.

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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 note worthy, asthis 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 lendersthat use technology to disrupt the small business lending market. Though still small relative to the traditional bank market, these new competitors providefast turn around and online accessibility for customers, anduse new data and credit scoring algorithms.

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English

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142

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