Small Business Lending

Abstract

Small businesses are engines of economic growth that are fueled in large part by bank lending. We examine the roles of technology and regulation in the supply of small business credit. Technological changes increase small business credit supply through the adoption of new hard-information-based lending technologies, such as FinTech lending, as well as by improving existing lending technologies. Technological progress has more modest effects on the processing and transmission of soft information used in relationship lending. Regulatory changes, such as pre-crisis deregulation and post-crisis reregulation, directly affect bank small business lending. The combination of technological progress and geographical deregulation also has resulted in more bank consolidation and competition, both of which have mixed effects on small business credit supply. Lastly, we cover the challenges and mitigating factors in explaining the dramatic drop in small business credit availability during the Global Financial Crisis and the very slow growth during the subsequent recovery.