August 2016
Small Business Lending Improves as Economy Stabilizes
Small businesses are an engine of growth and job creation for the U.S. economy. In order for small
businesses to grow, they require safe and reliable funding. According to the Small Business
Administration, bank credit and owner investment are the two most widely used kinds of financing
for small businesses. Younger firms tend to rely heavily on external funding, primarily from banks.
The economic recovery has expanded credit access to all businesses, including those that may not
have qualified when the economy was weaker. As the economy continues to grow, banks expect
small business credit to expand further.
Banks Are Increasing Small Business Loan Portfolios
According to the Federal Reserve, 82
percent of small businesses that applied
for financing in 2015 received at least
some of the credit they sought, a yearover-year increase of 17 percent.1
The volume of small business loans (under
$1 million) has increased in each of the
past nine quarters. Since the fourth quarter
of 2012, banks have grown their small
business loan portfolios by an average
annualized rate of 6 percent. Growth is
now stronger than the 5 percent average
yearly rate seen in the ten years prior to
the Great Recession.
In the past year, the volume of small business loans originated by banks increased 5.3 percent, the
second highest year-over-year growth since the first quarter of 2010. The rate of growth is nearly
five times of that experienced three years ago. The increase in lending can be attributed to a
combination of stronger demand and the improving economy.
Banks Are Partners to Small Businesses
Banks are critical partners to small businesses. They hold most small business loans on their
balance sheet, meaning they have a stake in the continued success of every one of their small
business customers.
Deposit funding, largely from the local community, enables banks to offer low interest rates and
better terms to small businesses seeking credit than online marketplace lenders. They are also
present in their communities and take a long-term view, making decisions that support the
continued vitality of those communities. This stable source of funding means that banks can stand
by their customers and continue lending in good times and bad. Small businesses can count on
banks to provide safe and reliable funding.
Traditional bank lending is the primary source of financing for small businesses. The majority of
small business borrowers, 73 percent, turn to banks first when seeking financing advice.1 Credit
applicants were most successful and most satisfied with their borrowing experience at small banks,
which received a borrower satisfaction score of 75 percent (compared to just 15 percent for online
lenders). Banks stand ready to serve the needs of small business borrowers.
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August 2016
Small Businesses Plan for Expansion
As the economy improves and uncertainty wanes, small businesses are making plans for
expansion. In fact, 61 percent of small businesses that applied for financing in 2015 were
borrowing to expand their business or pursue a new opportunity, according to the Federal Reserve.
In order for small business owners to carry out their plans for expansion they require outside
funding to purchase inventory, hire new employees and strengthen their position in the market.
Banks play a pivotal role in supplying small businesses with the funding they need to expand their
operations. Established businesses primarily rely on bank credit and owner investment for funding,
while new businesses receive about 75 percent of their funds from banks in the form of loans,
credit cards and lines of credit.2
Small businesses make up a large portion of U.S. jobs, making them crucial to the recovery of the
labor market. According to the U.S. Small Business Administration, small businesses provide 55
percent of all jobs and 66 percent of all net new jobs since the 1970s and propel the economy
forward.3 As small businesses continue to expand, they will continue to hire new employees; in
fact, 12 percent of small businesses plan to increase employment and 26 percent currently have job
openings. This positive effect on the workforce can be seen in the declining unemployment rate,
which has declined 0.6 percentage points from a year ago to 4.9 percent.4
Despite upward trending small business optimism, the expansion has been less robust because
consumer confidence has yet to recover from the Great Recession. While small businesses are
more willing to expand, only 8 percent
believe now is the right time – well below
the long term pre-recession average of 17
percent.
Businesses’ ability to plan for future growth
has been impeded by uncertainties
surrounding government regulation.
According to the NFIB survey, 22 percent
of small business respondents list
government red tape as their single most
important problem, well above the long
term pre-recession average of 12 percent
(1997-2007). Conversely, the survey
reported that financing and interest rates are
cited as the least concern for small businesses with only 2 percent citing financing as their most
important concern.
Banks proactive role in funding small businesses has helped the economy accelerate and create
jobs. Small businesses comprise a large portion of the American labor market; consequently, small
business lending has been a key factor to the declining unemployment rate and the increasing
workforce participation rate. As the market improves, and small business loan demand increases,
banks will be actively working with small businesses to meet their credit needs.
“2015 Small Business Credit Survey: Report on Employer Firms.” Federal Reserve. March 2016. https://www.federalreserve.gov/
“Small Business Finance, Frequently Asked Questions,” Small Business Administration. February 2014. www.sba.gov
3
“Small Business Trends,” Small Business Administration. February 2016. www.sba.gov
4
“Employment Situation Summary.” Bureau of Labor Statistics. February 2016. www.bls.gov
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