Banking and SME Financing in the United States

A Working Paper by Charles Ou, Ph.D., 

Office of Economic Research, Office of Advocacy, June 2006. 38 pages. 

This Small Business Research Summary summarizes one of a series of research papers prepared by the U.S. Small Business Administration’s Office of Advocacy or its research contractors. The opinions and recommendations of the authors of this study do not necessarily 

reflect official policies of the SBA or other agencies of the U.S. government. For more information, visit the Office of Advocacy’s Internet 

site at www.sba.gov/advo.

Background

Commercial banks have been the leading supplier of 

debt capital to small firms in the United States. With 

the increasing availability of small business lending 

statistics and of research on the topic, it becomes 

possible to provide an overview of the small business loan markets in the United States, as well as an 

evaluation of the impact of major developments on 

the cost and availability of loans to small businesses.

 The paper begins with a brief discussion of the 

market—the borrowers, lenders, and market organization—followed by a discussion of major developments in U.S. financial markets and the banking 

industry. Topics discussed include innovations in 

information technology and in financial modeling 

and financial products, as well as banking consolidation and the growth of interstate banking. The implications of increased competition in small business 

loan markets as evidenced by the emergence of a 

nationwide market for credit lines and business credit 

cards, and the entry of regional and national banks 

and bank holding companies (BHCs) into local markets are discussed.

Overall Findings

Loan markets for most small business borrowers in 

the United States have become more competitive 

over the past decade, evidenced by the emergence 

of a nationwide market for credit lines and credit 

cards and the entry of large regional banks in local 

markets. However, the impact of increased competition on the cost of funds to small firms, as indicated 

by the rate spreads between small business rates and 

the rates paid by the banks’ best prime customers, is 

more difficult to assess because of data limitations.

Highlights

• With more than 6,000 banks and BHCs serving 

millions of small business owners, the small business 

loan markets in the United States are made up of hundreds or even thousands of submarkets varying in size 

and borrower characteristics. Many of these markets 

are segmented, with various degrees of intermarket 

connection in the flows of funds.

• Competition in different submarkets also varies 

significantly—from highly competitive credit card 

markets for small businesses at the national level, to 

fairly competitive markets in major urban centers, 

to markets with very limited competition in remote 

rural areas and/or for specific ethnic groups. 

• The emergence of a nationwide market for small 

business credit lines and credit cards over the past 

decade is a significant development in small business financing. The number of small business loans 

outstanding (loans under $100,000) increased from 

about 5 million in 1995 to 14 million in 2004, compared with much smaller increases in larger small 

business loans, up from 1 million in 1995 to 1.7 

million in 2004. Most of the increases came from 

15 to 20 multi-billion-dollar banks and BHCs; they 

accounted for more than 50 percent of the number of 

loans under $100,000 outstanding. Fourteen banks/

BHCs have extended business loans in more than 40 

states, according to the 2003 database of information 

submitted by banks as required by the Community 

Reinvestment Act (CRA). 

• The entry of large regional banks into local 

markets also increased market competition in local 

small business markets. In 2003, of 370 banks/BHCs 

that made larger small business loans (loans between 

$100,000 and $1 million) in more than one state, 34 

have lending activities in more than 10 states.

June 2006 No. 277
• It is more difficult to study the impact of 

increased competition on interest rate spreads 

between small business loans and loans to the banks’ 

best customers. The prime rate served as the proxy 

for the rates charged to banks’ best customers in 

earlier years, but prime customers have generally 

been charged rates below prime since the 1990s.

Information on the rate premium over the base (or 

the index) in the rate adjustment formula of loan 

agreements would be most useful to an understanding of this issue. 

Scope and Methodology

The databases used for the analysis include Reports 

of Condition and Income (call reports), reports submitted under the requirements of the Community 

Reinvestment Act (CRA reports), and Statistical 

Release E.2—the Survey of Terms of Business 

Lending conducted quarterly by the Federal Reserve 

Board. Studies on small business lending using 

these databases, including, for example, the Office 

of Advocacy’s annual banking studies (available at 

http://www.sba.gov/advo/research/banking.html), 

are reviewed and summarized. Time series statistics 

were generated for analysis of the trends in small 

business lending by banks.

This report was peer-reviewed consistent with 

Advocacy’s data quality guidelines. More information on this process can be obtained by contacting the Director of Economic Research at 

advocacy@sba.gov or (202) 205-6533.

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studies performed under contract with the U.S. Small 

Business Administration’s Office of Advocacy are 

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