3. Small Business Lending Before, During, and Following the Great Recession 3.1 Overview In order to discuss the broader effects of the Gr...
3. Small Business Lending Before, During, and Following the Great Recession 3.1 Overview In order to discuss the broader effects of the Great Recession, we analyze small business lending patterns over three periods: the “Pre-period,” the “Great Recession,” and the “Recovery.” According to the National Bureau of Economic Research, the official period of contraction lasted from December 2007 to June 2009. Given that we are using annual data for all analyses, we define the Recession period as 2008 to 2009. The Recovery period follows naturally as 2010 to 2017, which are the most recent years with available data from all data sources. The beginning of the Pre-period is more difficult to define. To allow for enough recovery from the brief recession in 2001 and to ensure that small business lending was represented close to the preRecession levels we chose 2004 as the starting point for the Pre-period. Therefore, for the purposes of this analysis the “Pre-period” covers 2004 to 2007, the “Great Recession” 2008 to 2009, and the “Recovery” 2010 to 2017. To provide context for the discussion, Figure 1 shows the total count of small business loans at the national level since 2000, with each of the three time periods shaded. 18 As Figure 1 shows, our definitions of Pre-period, Great Recession, and Recovery appear to reflect the data well. At the national level, small business lending increased during the Pre-period, fell sharply during the Great Recession, and has been slowly rising during the Recovery, but has not returned to pre-Recession levels.
To focus the results and discussion on the supply of credit, when possible, we normalize all results by a measure of demand. The number of businesses roughly approximates to demand as the existence of firms is essential for small business lending. Specifically, “small business lending” will be presented as the number of small business loan originations per business. Normalizing the data in this way allows for the distinction between counties with few loan originations because there are few businesses in the county, and counties with few loan originations despite a high number of businesses in the county. There are a number of potential drivers of the patterns in small business lending that we identify and discuss in this paper, including characteristics of the local economies and the health of credit markets for small businesses. This paper focuses only on identifying and presenting patterns, and not on an analysis of the drivers of these patterns. Our analysis uses number of loan originations to define small business lending as opposed to using loan amount. Using loan amount could result in a measure of small business lending that varies drastically based on larger dollar loans (up to the $1 million cutoff used to define SBLS in the CRA data) to high growth or larger small businesses rather than reflecting the landscape of small businesses which total number of originations better represents.
Four out of five small businesses within the United States are nonemployer, and using originations allows for those businesses to be better reflected in this analysis, as nonemployer businesses, while they are less likely to take out small business loans, generally take out smaller loans when they do borrow. 19 The measure of the number of businesses in each year relies on two measures: the County Business Patterns (CBP) and the Nonemployer Statistics (NES), both from the U.S. Census. The County Business Patterns counts the number of employer businesses during the week of March 12th. 20 The Nonemployer Statistics counts the number of nonemployer establishments using business income tax records from the IRS. 21 These two measures are added to produce an estimate of the number of total businesses in a county, which acts as a proxy for the small business activity and the potential universe for small busineses that could access credit. As a robustness check, we considered a number of alternative measures to reflect small business lending. Figure 2 presents six specific measures we analyzed: total loans, loans per person, loans per business, total dollar amount of loans, dollar amount per person and dollar amount per business. All results are normalized to 100 percent in 2004. Although the three dollar amount measures show more muted patterns during the Pre-period and the Great Recession, all six measures show the same general pattern from Figure
Small business lenders In order to characterize the small business lending market during the Great Recession, it is also important to understand the entities supplying credit during that time. 30 The total number of depository financial institutions in the U.S. has been steadily declining for many years. Figure 13 shows the total number of unique financial institutions by type over time. The number of all types of Depository Institutions (credit unions, community banks, thrifts, and large banks) has shrunk by 41 percent since 2000. 31 (This report classifies banks into “large” or “community” based on the FDIC’s definition of a community bank in coming up with these figures). 32 This downward trend in number of institutions has been consistent during the entire period, other than a slight increase and then decline for large banks from 2007-2009.
A segment of the SBL market growing in importance is the Fintech market. 34 Estimates by S&P found that five large Fintech lenders (OnDeck, Kabbage, Credibly, Square Capital and PayPal Working Capital) that focus on Small and Medium Enterprise (SME) businesses originated $6.5 billion of loans in 2017, and the report found year-over-year increases of SME lending by these Fintech lenders since 2014. 35 A white paper produced by the Bureau in 2017 estimated the small business lending market was $1.4 trillion outstanding, indicating that Fintech lending only refers to a part of the SBL marketplace. 36 An annual survey by the Federal Reserve of employer
small businesses found a growing number of small businesses apply to online lenders when seeking credit—rising from 19 percent in 2016 to 32 percent in 2018, indicating the increasing importance of the online market. 37 Figure 14 shows for each type of institution the share of lenders that offer small business loans. For community banks, large banks and credit unions, the number of institutions that offer small business products is divided by the total number of institutions and plotted yearly. Since relevant data for thrifts are only available after 2012, the share of thrifts that offer small business lending products is calculated from 2012 on. The Total line represents the share of all institutions that are small business lenders – note that it jumps at 2012 once thrifts are included in the calculation. Most notable in Figure 14 is the variation across institution type in the percentage of institutions that offer small business products. Consistent with the literature on the role of community banks in small business lending, nearly all community banks offer small business products. This finding contrasts with credit unions where less than 21 percent of all credit unions offer small business products in each year. Nonetheless, the share of credit unions that offer small business products has been growing over time.
Figure 14 presents the shares of existing institutions that offer small business products but does not reflect the absolute number of such depository institutions that are in operation or those that offer small business credit. Figure 15 presents the number of each institution type that offer these products for the institutions that we are analyzing. All results are normalized to 100 in 2004. Thrifts are broken out separately and not further broken out by whether they provide small business lending products, because information on small business lending was taken from Call Reports, and thrifts reported Call Report data only from 2012 through 2017. Prior to 2012, thrifts reported thrift Financial Reports, which are not available electronically.
Figure 15 shows the decline in the number of financial institutions over recent years. Other than credit unions that offer small business lending products, the number of each institution type declined by at least 25 percent between 2004 and 2017. Figure 15 shows the significant variation across institution types. As noted, the number of credit unions offering small business lending products has increased by over 40 percent since 2004. According to Figures 13 and 14, this increase is a result of more existing credit unions making Small Business loans, rather than new credit union entrants into the market. In addition, for the remaining institution types that showed declines, the number of community banks and large banks that offer small business products declined less than community banks and large banks that did not offer small business lending products. Although bank lending to small businesses has contracted considerably, research commissioned by the SBA Office of Advocacy and conducted by researchers at the University of CaliforniaBerkeley found that small business lending among credit unions partially offset the fluctuations
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