Small Business Lending Survey 37

SECTION 5. 

Loan Products and Underwriting 

Practices

47 See Berger et al., “Function Follow Form?,” for example.

48 A list of five products was provided; banks were also given a write-in option.

This section explores whether and to what extent 

the established view of small business lending—that 

small and large banks differ in their small business 

lending models—is supported by differences in loan 

products offered and approaches to underwriting. 

Understanding differences that may exist is a 

prerequisite for understanding how small businesses’ 

access to credit may be affected as the U.S. banking 

industry changes. For example, knowing whether 

large banks base extensions of credit on quantifiable 

information may be particularly important to startups and other small businesses that lack a long track 

record of performance.47 Therefore, to explore how 

small and large banks manage their small business 

lending, the survey asked about the small business 

loan products offered by banks and about banks’ 

underwriting practices. 

Specifically, the survey asked what loan products 

are offered by small and large banks; what needs 

these products meet; what underwriting criteria 

are evaluated; what collateral is accepted; for what 

reasons the bank is willing to make underwriting 

exceptions; does the bank require a minimum loan 

amount and use standardized loan products; and 

finally, does the bank lend to start-ups, and if so, 

does it underwrite such loans differently from loans 

made to established small businesses.

5.1 What Loan Products Does Your Bank 

Offer to Small Businesses? 

The survey examines whether the different small 

business lending models of small and large banks as 

suggested by the established view result in different 

loan products being offered by the two sizes of 

banks. For example, one result of large banks’ heavy 

reliance on quantifiable information may be that 

more large banks than small banks offer credit cards, 

which in turn could reduce the willingness of large 

banks to offer loans requiring greater staff input. 

Specifically, the survey asked banks what 

commercial and industrial loan products they 

offered to small businesses in 2015 and which of 

these were their top product by loan volume.48 The 

results show that there are few differences in the 

loan products that small and large banks offer to 

small businesses and that there are certain core loan 

products used by nearly all banks to extend such 

credit. The results also show, however, that the top 

products of small and large banks differ.

Figure 5.1, Panel A, shows that large majorities of 

both small and large banks are equally likely to 

offer the same loan products to small businesses, 

namely, lines of credit (94.6 percent and 97.9 

percent), amortizing term loans (91.1 percent and 

95.9 percent), and balloon term loans (84.5 percent 

and 79.0 percent). Although majorities of both small 

and large banks offer letters of credit, large banks 

are more likely to offer this product to their small 

business customers (73.2 percent for small banks, 

87.5 percent for large banks).

As expected, the most notable difference is in the 

share of small and large banks that offer credit cards 

to small businesses. Large banks are more than 

three times as likely as small banks to offer credit 

cards (68.8 percent and 21.0 percent), a finding that 

is consistent with the established understanding 

that large banks rely more on automation and 

predetermined limits in their decisionmaking about 

small business loans. The underwriting of credit cards 

typically uses quantifiable information (such as credit 

scores), which can be evaluated quickly and does not 
38 FEDERAL DEPOSIT INSURANCE CORPORATION

Section 5

require interaction with bank staff or specialized 

information about the business or the local market. 

In identifying their top C&I loan product to small 

businesses, both small and large banks cite only 

one of three: amortizing term loans, balloon term 

loans, and lines of credit. Figure 5.1, Panel B, shows 

that small banks are equally likely to indicate any 

one of the three as their number one product by 

volume, with about a third of small banks citing 

each as their top one.49 Large banks, on the other 

hand, are more likely (52.0 percent) to indicate that 

lines of credit are their number one product by 

volume; amortizing term loans are a distant second 

(24.9 percent), and balloon term loans an even more 

49 The testing of differences between the shares of small banks indicating one of these three products over another as their number one loan product by volume did not reveal statistically significant differences.

50 There is no statistically significant difference between small and large banks in their likelihood of having amortizing term loans 

as their top product.

distant third (12.4 percent). Further, lines of credit 

are more likely to be the top product for a larger 

share of large banks than small banks (52.0 percent 

and 31.1 percent), while balloon term loans are the 

top product for a larger share of small banks (30.6 

percent and 12.4 percent).50

Overall, these results—that there are core loan 

products used by all banks to extend credit to small 

businesses but that the top products differ for the 

two types of banks—could imply either that the 

small businesses that borrow from one size bank 

have different needs from the small businesses that 

borrow from the other size bank, or that small and 

large banks have distinct advantages in providing 

Figure 5.1: Percentage of Banks That Offer This Loan Product to Small Businesses

Source: SBLS Question 19.

Notes: Entries marked with a “w” indicate that the number of responses falls below the allowable reporting threshold for 

protecting respondents’ identities. At the statistical significance of 10 percent, “*” denotes that small banks are more likely 

than large banks to offer this loan product to small businesses; “+” that large banks are more likely than small banks. In Panel A, 

banks may select multiple answers; results will not sum to 100.0 percent. In Panel B, banks were asked which is their number one 

product used by small businesses, by dollar volume of originations in 2015.

A. Offers Product B. Number One Product, by Dollar Volume

68.8 +

87.5 +

79.0

95.8

97.9

21.0

73.2

84.5

91.1

94.6

0.0 20.0 40.0 60.0 80.0 100.0

Credit Card

Letter of Credit

Balloon

Term Loan

Amortizing

Term Loan

Line of Credit

Small Large

w 

0.0

12.4

24.9

52.0 +

0.0

0.7

30.6 *

33.1

31.1

0.0 20.0 40.0 60.0 80.0 100.0

(Mark All That Apply) (Mark Only One)
 Small Business Lending Survey 39

Section 5

balloon term loans (small banks) or lines of credit 

(large banks).

5.2 For What Purposes Do Small 

Businesses Use These Products? 

Small businesses use credit to meet different 

needs. Some are longer term, such as equipment 

purchases, and others are shorter term, such as 

accounts receivable, and different loan products 

may be better suited for one purpose over another. 

Thus, the survey asked about the purposes for 

which the top loan products are used. While there 

is substantial overlap in the purposes for which 

all types of loans are extended, the results (see 

Figure 5.2) show that term loans (both amortizing 

and balloon) are most often extended for longerterm purchases of equipment or other fixed assets 

and that lines of credit are most often extended 

for shorter-term purposes. Because the findings 

reveal that small and large banks generally do not 

51 Statistically, the share of banks that report financing equipment/fixed assets with amortizing term loans is significantly higher 

than the share of banks that report any of the other three loan purposes, tested separately. This is true for both small banks 

and large banks. The number of large banks with balloon term loans as their top product fell below the threshold for protecting 

respondents’ identities, and therefore the difference between small and large banks could not be tested.

52 When lines of credit are a bank’s number one product, there are statistically significant differences among loan purposes except 

between working capital and inventory. 

differ much in the purposes for which specific loan 

products are extended, the results for small and 

large banks are combined here.

Specifically, almost all banks with amortizing 

or balloon term loans as their top product report 

that these loans are typically used to support the 

financing of longer-term asset purchases such 

as equipment (97.6 percent for amortizing term 

loans, 94.4 percent for balloon term loans).51 By 

contrast, about half, 56.9 percent, of banks with 

lines of credit as their top product see these loans 

as financing equipment purchases. Instead, lines 

of credit are more often used to finance day-today operations, such as accounts receivable (70.5 

percent), inventory (85.6 percent), and working 

capital (88.6 percent).52 These shares are between 

18 and 30 percentage points higher than for banks 

whose top product is either of the two types of term 

loans. While small sample sizes prohibit detailed 

comparisons between small and large banks split 

by top loan product for term loans, an analysis 

Figure 5.2: Percentage of Banks That Cite This as the Purpose for Which Their Number One Loan 

Product to Small Businesses Was Used 

(All Banks Combined)

Source: SBLS Question 22C.

Notes: At the statistical significance of 

10 percent, “Ϯ” denotes that amortizing 

term loans are more likely than balloon 

term loans and lines of credit to be 

used to purchase equipment/fixed 

assets, and more likely than balloon 

term loans to be used for working 

capital; “ϮϮ” that balloon term loans 

are more likely than lines of credit 

to be used to purchase equipment/

fixed assets; “ϮϮϮ” that lines of credit 

are more likely than amortizing and 

balloon term loans to be used for 

accounts receivable, inventory, and 

working capital. Banks may select 

multiple answers; results will not sum 

to 100.0 percent. 

88.6ϮϮϮ

85.6ϮϮϮ

56.9

70.5ϮϮϮ

61.9

56.2

94.4ϮϮ

38.7

70.3Ϯ

60.2

97.6Ϯ

39.5

0.0 20.0 40.0 60.0 80.0 100.0

Working Capital

Inventory

Equipment/Fixed Assets

Accounts Receivable

Amortizing Term Loans Balloon Term Loans Lines of Credit
40 FEDERAL DEPOSIT INSURANCE CORPORATION

Section 5

(not shown) of the loan purposes for lines of credit 

shows that both small and large banks are more 

likely to use lines of credit for shorter-term purposes.

These results, coupled with the tendency of large 

banks to extend lines of credit more often than 

small banks do, suggest that small banks may play 

a larger role in financing long-term investments 

by small businesses. It is therefore possible that the 

continuing shift from small banks to large banks 

could pose problems for small businesses that are 

attempting to grow. 

5.3 Which Underwriting Criteria Are 

Used by Your Bank to Evaluate 

Small Business Borrowers?

The survey investigates differences in the 

underwriting criteria used by small and large 

banks because the established view implies 

separate approaches to small business lending. And 

differences in criteria may produce differences in 

access to loans. For example, if large banks satisfy 

their evaluation criteria by requiring standard 

information, some small businesses may find it 

harder than others to provide such information. 

Specifically, the survey asked banks to indicate 

how often they use specific underwriting criteria to 

evaluate small businesses for their top loan product.53

The results show that banks of all sizes assess a wide 

variety of underwriting criteria in evaluating small 

businesses for loans, and the set of criteria does 

not typically differ by bank size. Figure 5.3 shows 

that, for 11 of the 14 possible criteria provided by 

the survey, large majorities of both small and large 

banks “always” or “almost always” evaluate each 

criterion. The findings suggest that banks of all sizes 

use most of the quantifiable information available to 

them to evaluate the creditworthiness of their small 

business applicants. 

53 The survey asked whether the underwriting criteria they use are the same across the types of products they offer, even if the 

limits for approval are different. Majorities of both small and large banks (91.1 percent and 66.5 percent) say they use the same 

underwriting criteria across loan products. Since the same criteria are used across products, the discussion here of underwriting 

criteria combines answers across the three top loan products. Note, however, that although majorities of both small banks and 

large banks say they use the same underwriting criteria across products, the proportion of large banks doing so is considerably 

smaller than the proportion of small banks—a result implying that large banks are more likely to use different standards by product. 

54 Banks were offered eight collateral options, and were also given a write-in option.

However, some differences between small and large 

banks exist. Small banks are statistically more likely 

than large banks to evaluate traditional loan and 

owner characteristics, namely, loan debt-service 

coverage (95.7 percent and 78.5 percent), loan-tovalue (95.0 percent and 74.3 percent), owner net 

worth (93.2 percent and 82.9 percent), and owner 

debt-to-worth (70.0 percent and 57.5 percent). Large 

banks are more likely than small banks to evaluate 

personal guarantees (95.7 percent and 86.2 percent), 

owner credit score (91.6 percent and 79.2 percent), 

and business age (87.4 percent and 71.3 percent). The 

largest difference between small and large banks 

is in the use of business credit score. Whereas 64.1 

percent of large banks indicate that they always or 

almost always evaluate business credit score, only 

14.8 percent of small banks do. Further, business 

credit score is the criterion least often cited by small 

banks. Overall, these differences suggest that firms 

whose owners have a lower credit score and fewer 

outside resources, and firms that are younger, may 

be more likely to obtain funding at a small bank.

5.4 What Collateral Does Your Bank 

Accept from Small Businesses?

Another aspect of underwriting that may reflect 

the distinct approaches of small and large banks 

to small business lending is the collateral accepted. 

For example, the standardized approach of large 

banks may make them reluctant to lend against 

collateral whose value is not easily established or 

that is not easily sold. Differences, if any, in the 

types of collateral typically accepted will bear on 

the question of whether, as the local composition of 

banks changes, certain types of firms will have more 

trouble securing a small business loan. Thus, the 

survey asked banks to describe what collateral they 

commonly accept—or to indicate if they commonly 

accept no collateral—for their top loan product.54
 Small Business Lending Survey 41

Section 5

The results, which are reported in Figure 5.4, show 

that majorities of both small and large banks accept 

nearly all types of collateral. However, there are a 

few small statistical differences. Large banks are 

slightly more likely than small banks to accept 

business assets (97.9 percent and 93.3 percent). 

Small banks are more likely than large banks 

to accept real estate collateral, both commercial 

real estate (90.6 percent and 76.6 percent) and 

personal real estate (70.4 percent and 57.5 percent). 

The widespread acceptance of real estate–related 

collateral and the “localness” of small banks’ 

small business borrowers (discussed in Section 3) 

reinforce the notion that small banks are tied to the 

outcomes of their local communities. 

There is also one large difference: large banks are 

three times as likely as small banks to commonly 

accept no collateral for their small business loans 

(53.5 percent and 17.7 percent). This result is 

consistent with the expectation that small banks 

rely more heavily on collateral to mitigate the risk 

of lending to small businesses, since large banks are 

better able to mitigate risks by lending in multiple 

markets and making a high volume of loans. This 

result is also consistent with findings that large 

Figure 5.3: Percentage of Banks That “Always” or “Almost Always” Use This Underwriting 

Criterion to Evaluate Small Business Loan Applicants for Their Number One Loan 

Product to Small Businesses

Source: SBLS Question 22E.

Notes: At the statistical significance 

of 10 percent, “*” denotes that small 

banks are more likely than large banks 

to “always” or “almost always” use 

this underwriting criterion to evaluate 

loan applicants for their number one 

loan product to small businesses; “+” 

that large banks are more likely than 

small banks. Banks may select multiple 

answers; results will not sum to 100.0 

percent.

64.1 +

23.4

31.9

57.5

68.0

87.4 +

91.6 +

72.3

78.5

78.6

95.7 +

82.9

74.3

78.5

14.8

17.7

32.4

70.0 *

70.5

71.3

79.2

82.3

85.3

85.7

86.2

93.2 *

95.0 *

95.7 *

0.0 20.0 40.0 60.0 80.0 100.0

Business Credit Score

Other Guarantee

Sell Cycle

Owner Debt-to-Worth

Business Debt-to-Worth

Business Age

Owner/Guarantor

Credit Score

Business Cash/Liquidity

Business Global DSC

Owner Experience

Personal Guarantee

Owner Net Worth

Loan-to-Value Ratio

Loan Debt-Service

Coverage (DSC)

Small Large
42 FEDERAL DEPOSIT INSURANCE CORPORATION

Section 5

Figure 5.4: Percentage of Banks That Commonly Accept This Collateral for Their Number One 

Loan Product to Small Businesses

Source: SBLS Question 22D.

Notes: At the statistical significance 

of 10 percent, “*” denotes that small 

banks are more likely than large banks 

to commonly accept this collateral for 

their number one loan product to small 

businesses; “+” that large banks are 

more likely than small banks. Banks 

may select multiple answers; results 

will not sum to 100.0 percent.

14.8

53.5 +

55.4

70.1

70.1

57.5

78.9

76.6

97.9 +

8.1

17.7

58.3

62.3

63.4

70.4 *

72.9

90.6 *

93.3

0.0 20.0 40.0 60.0 80.0 100.0

Other

No Security/Collateral

Required

Personal Assets

Cash/Liquid Assets,

Owner/Guarantor

Cash/Liquid Assets,

Business

Real Estate, Personal

Accounts

Receivable/Inventory

Real Estate,

Commercial

Business

Assets/Equipment

Small Large

Figure 5.5: Percentage of Banks That Cite This as a Typical Reason to Make Exceptions to Loan 

Policy for Their Number One Loan Product to Small Businesses

Source: SBLS Question 22F.

Notes: At the statistical significance 

of 10 percent, “*” denotes that small 

banks are more likely than large 

banks to cite this as a typical reason 

to make exceptions to loan policy for 

their number one loan product to small 

businesses; “+” that large banks are 

more likely than small banks. Banks 

may select multiple answers; results 

will not sum to 100.0 percent.

0.0

27.7

31.9

36.1

61.5

65.7

85.0

1.7

17.4

36.4

37.3

62.1

65.2

83.2

0.0 20.0 40.0 60.0 80.0 100.0

No Exceptions Allowed

Existing Competing Offers

Positive Borrower 

Business Prospects

Potential for Other Banking 

Relationships with Borrower

Existing Deposit Relationship

Existing Loan Relationship

Existing Loan & 

Deposit Relationship

Small Large
 Small Business Lending Survey 43

Section 5

banks are more likely to lend to large, mature firms, 

which typically have more established credit records.55

5.5 When Is Your Bank Willing to Make 

an Underwriting Exception for a 

Small Business? 

Under certain circumstances, banks may be willing 

to make exceptions to their internal underwriting 

policy. The use of exceptions, therefore, is another 

area in which small and large banks may have 

distinct approaches to small business lending. 

Small banks collect nonstandard data while 

regularly interacting with small firms, and this 

“soft” information may be used to grant exceptions 

to underwriting policy. In contrast, large banks’ 

reliance on standard information and predetermined 

thresholds makes it hard to predict a basis on which 

exceptions would be made. Thus, the survey asked 

banks to cite the circumstances under which they 

are willing to deviate from their usual underwriting 

practices.56 Perhaps surprisingly, both small and 

large banks reported that exceptions to underwriting 

policy are most likely considered because of a 

previous relationship with the small business 

borrower. Further, the results show that small and 

large banks have statistically equal percentages 

for each of the reasons for allowing exceptions to 

underwriting policy.

Figure 5.5 shows that large majorities of both small 

banks (83.2 percent) and large banks (85.0 percent) 

say that a combined existing loan and deposit 

relationship is a reason to make an exception to 

underwriting policy. In addition, about two-thirds 

of both small and large banks say that an existing 

loan relationship (65.2 percent and 65.7 percent) 

or an existing deposit relationship (62.1 percent 

and 61.5 percent) alone is a reason to make an 

exception. These findings, while consistent with 

55 See, for example, Haynes, Ou, and Berney, “Small Business Borrowing,” or Berger et al., “Function Follow Form?” 

56 Banks were provided with a list of eight possible options, and were also given a write-in option. Although large majorities of 

both small and large banks reported “Strong Mitigating Factors,” the option is dropped in this discussion because it was subsequently deemed to include almost all the other options.

57 Note, however, that the survey asked about reasons for exceptions rather than the frequency with which banks make exceptions.

58 Standardized loan products are ones in which the terms of the loans are preset and the criteria for suitability and approval are 

easily measurable and predetermined.

the expectations for small banks, are somewhat 

unexpected for large banks.57 Nonetheless, they 

suggest that maintaining relationships in conducting 

small business lending is important to both small 

and large banks. 

About one-third each of small and large banks also 

consider potential for other banking relationships 

with borrower (37.3 percent and 36.1 percent) 

and positive business prospects for the borrower 

(36.4 percent and 31.9 percent) as reasons for 

underwriting exceptions, and smaller shares take 

into account existing competing offers (17.4 percent 

and 27.7 percent). 

5.6 Does Your Bank Require Minimum 

Loan Amounts and Use Standardized 

Loan Products?

An important potential difference between small 

and large banks stemming from their distinct 

approaches is the way they manage loan requests 

from small businesses, and specifically whether 

they apply preset criteria. Two common preset 

criteria are a required minimum loan amount 

and the use of standardized loan products. Small 

banks’ use of nonstandard information may lead 

to greater flexibility and willingness to customize 

loans according to the individual needs of a small 

business. Large banks’ use of predominantly 

standard data may enable a high-volume, economiesof-scale model, with the fixed administrative costs 

of underwriting covered by the use of a required 

minimum loan amount or minimized by the use of 

standardized products that have a preset structure 

and preset offered terms. Therefore, the survey 

explores differences between small and large banks 

in the use of loan amount floors and standardized 

small business loan products.58 The results show that 

large banks are indeed more likely to use both.
44 FEDERAL DEPOSIT INSURANCE CORPORATION

Section 5

Figure 5.6 shows the share of banks that require a 

minimum loan amount for their top loan product to 

small businesses. Only a small share (14.8 percent) of 

small banks require a minimum loan amount for their 

top loan product to small businesses, compared with 

a majority (69.8 percent) of large banks. This finding 

suggests that a small business needs to request a loan 

of a certain size at most large banks before the bank is 

willing to consider making a loan. The findings also 

support the view that small banks remain flexible 

when evaluating a potential small business borrower.

Figure 5.7 shows the share of banks that use 

standardized loan products. As expected, a majority 

of large banks (64.7 percent) use such products. While 

only a modest share (8.4 percent) of small banks use 

standardized products, within the group of small 

banks as a whole there are differences by size. In fact, 

the likelihood of using standardized loan products 

grows with size. Only 3.8 percent of banks with less 

than $250 million in assets use standardized loan 

products (not shown), but 11.6 percent of banks with 

assets between $250 million to $1 billion do, and 

Figure 5.7: Percentage of Banks That Use Standardized Small Business Loan Products

Source: SBLS Question 5.

Notes: At the statistical significance 

of 10 percent, “+” denotes that large 

banks are more likely than small banks 

to use standardized small business 

loan products.

8.4

64.7 +

0.0

20.0

40.0

60.0

80.0

100.0

Small Large

Figure 5.6: Percentage of Banks That Require a Minimum Loan Amount for Their Number One Loan 

Product to Small Businesses

Source: SBLS Question 22B.

Notes: At the statistical significance 

of 10 percent, “+” denotes that large 

banks are more likely than small banks 

to require a minimum loan amount for 

their number one loan product to small 

businesses.

14.8

69.8 +

0.0

20.0

40.0

60.0

80.0

100.0

Small Large
 Small Business Lending Survey 45

Section 5

27.3 percent of banks with assets between $1 billion 

and $10 billion do as well.59 The advantages to small 

businesses from using standardized loan products are 

that the underwriting can be quicker to process and 

the products can offer more competitive interest rates. 

The disadvantages are that only a subset of small 

businesses may be able to satisfy the standard criteria 

required to qualify for them, and the small businesses 

seeking the loans may prefer loan terms different 

from the ones offered. 

5.7 Does Your Bank Lend to Start-Ups, 

and if so, Do You Underwrite the 

Loans Differently from Loans for 

Established Small Businesses?

New small businesses—start-ups—are central to 

the concern about whether small and large banks’ 

distinct approaches to small business lending 

produce differences in access to small business 

loans. When start-ups survive, they create more 

net jobs in the United States than businesses of any 

other age group, and start-ups have higher rates 

of employment growth and productivity growth 

than older firms. The likelihood of their survival 

increases with their access to credit.60 Yet start-ups 

lack much of the standardized information used to 

underwrite loans, and therefore the nonstandard 

information used by small banks may be especially 

important for new firms’ access to bank credit. As 

59 These differences are statistically significant. 

60 On net job creation, see Tim J. Kane, “The Importance of Startups in Job Creation and Job Destruction,” Kauffman Foundation 

Research Series, Firm Formation and Economic Growth, July 2010, http://dx.doi.org/10.2139/ssrn.1646934. On employment 

growth, see John Haltiwanger, Ron S. Jarmin, and Javier Miranda, “Who Creates Jobs? Small versus Large versus Young,” 

Review of Economic and Statistics 95, no. 2 (2013): 347–61, https://doi.org/10.1162/REST_a_00288. On productivity growth, 

see Alon et al., “Older and Slower.” On the relationship between survival and access to credit, see Alicia M. Robb and David 

Robinson, “The Capital Structure Decision of New Firms,” Review of Financial Studies 27, no. 1 (2014): 153–79; Jeongsik J. Lee 

and Wei Zhang, “Financial Capital and Startup Survival,” Academy of Management Proceedings 2011, no. 1 (2017), https://doi.

org/10.5465/ambpp.2011.65869494; Traci Mach and John D. Wolken, “Examining the Impact of Credit Access on Small Firm 

Survivability,” Federal Reserve Board, Finance and Economics Discussion Series, Working Paper No. 35 (2011), http://dx.doi.

org/10.2139/ssrn.1956696; and Rebel A. Cole and Tatyana Sokolyk, “How Do Firms Choose Legal Form of Organization? Evidence 

from the Kauffman Firm Surveys,” Working Paper (July 16, 2018), https://ssrn.com/abstract=2028176. 

61 Again, see, for example, Haynes, Ou, and Berney, “Small Business Borrowing,” or Berger et al., “Function Follow Form?”

62 The survey finds that the median age under which both small and large banks state they define a start-up is two years. The mean 

age is also two years. However, small banks have slightly more variance across quartiles. Whereas large banks at the 25th and 

75th percentile consider businesses under two years of age to be a start-up, small banks at the 25th percentile consider businesses under one year of age to be a start-up, and those at the 75th percentile consider businesses under three years of age to be a 

start-up. (See SBLS Question 21a.) 

noted above, several studies conclude that large 

banks are less likely than small banks to lend to 

small, young firms, and more likely to lend to 

large, mature firms.61 To address the issue of how 

the growth in large banks’ share of bank assets 

might affect start-ups’ ability to access financing, 

the survey asked banks about their underwriting 

practices for loans to new small businesses.

Most banks define start-ups as younger than two 

years,62 and the survey finds that most banks 

make loans to start-ups. Figure 5.8 shows that 79 

percent of small banks and 73.2 percent of large 

banks make such loans. The statistically equal 

likelihood of small and large banks lending to startups is somewhat surprising, given the advantages 

that small banks are thought to have in using 

nonstandard information to overcome the data 

constraints of new businesses. However, a reported 

willingness to lend does not necessarily indicate the 

level of actual lending to start-ups.

To minimize the risk associated with lending to an 

untested new business, banks may require start-ups 

to meet additional underwriting criteria, and 

this requirement, in turn, may create substantial 

barriers to actually obtaining a loan. Thus, the 

survey asked banks an open-ended question to 

describe any differences between the underwriting 

criteria used for start-ups and those used for 

established small businesses.
46 FEDERAL DEPOSIT INSURANCE CORPORATION

Section 5

Most banks underwrite loans to start-ups 

differently from how they underwrite other small 

business loans, but large banks are much more 

likely to do so than small banks. Figure 5.9 shows 

that less than 10 percent of large banks report 

using the same underwriting procedures for startups as for established small businesses, whereas 

a substantial share of small banks use the same 

procedures (38.8 percent).

Large banks are also much more likely than small 

banks to mention looking for guarantees as part 

of their additional underwriting process for startups. More than 80 percent of large banks say they 

Figure 5.8: Percentage of Banks That Make C&I Loans to Start-Up Small Businesses

Source: SBLS Question 21C.

Notes: At the statistical significance 

of 10 percent, small and large banks 

are equally likely to make C&I loans to 

start-up small businesses.

79.0

73.2

0.0

20.0

40.0

60.0

80.0

100.0

Small Large

Figure 5.9: Percentage of Banks That Underwrite Start-Up Small Businesses Differently from 

Established Small Businesses, Using a Practice in This Category

Source: SBLS Questions 21C1 and 

21C1a.

Notes: Entries marked with a “w” 

indicate that the number of responses 

falls below the allowable reporting 

threshold for protecting respondents’ 

identities. At the statistical 

significance of 10 percent,“*” denotes 

that small banks are more likely than 

large banks to underwrite start-up 

small businesses differently from 

established small businesses using this 

practice; “+” that large banks are more 

likely than small banks. Underwriting 

categories aggregate individual bank 

responses to an open-ended question; 

results will not sum to 100.0 percent. 

Although banks were asked this 

question only if they had responded 

“yes” to whether they underwrite 

start-up small businesses differently 

from established small businesses, the 

numbers reported in the figure show 

percentage shares for all banks.

w 

w 

17.2

20.0

60.3 +

80.2 +

8.5

9.4

17.9

18.0

8.2

14.3

26.7

38.8 *

0.0 20.0 40.0 60.0 80.0 100.0

Business

Characteristics

Additional

Documentation

Owner Characteristics

Personal/Third-Party

Guarantee

SBA Guarantee

Any Guarantee

Underwrites the Same

Small Large

Guarantees

Other
 Small Business Lending Survey 47

Section 5

explore some form of additional guarantee, including 

Small Business Administration (SBA) guarantees, 

compared with only 26.7 percent of small banks. 

Large banks show particular interest in SBA support, 

with 60.3 percent mentioning these programs as 

an additional criterion, compared with only 14.3 

percent of small banks.

In contrast, small banks describe using more 

diverse and generally “softer” additional criteria 

for underwriting start-ups. These include requiring 

additional documentation such as business plans 

(17.9 percent), or looking at business characteristics 

such as the start-up’s industry or the quality of its 

management (9.4 percent).63 Whereas small and 

large banks are equally likely (18.0 percent and 17.2 

percent) to describe aspects of owner characteristics 

in their additional criteria, small banks use a greater 

variety of terms in this category, such as education, 

training, or personal credit history.64 These 

differences between small and large banks suggest 

that small banks are more flexible in underwriting 

start-up loans.

5.8 Conclusions

This section investigates whether small and large 

banks differ in how they conduct their small 

business lending, and if they do differ, whether some 

small businesses are potentially better served by 

small banks. Inasmuch as some small banks have 

been shown to use a wider range of information 

to underwrite loans, one would expect that startups and less established small businesses are more 

likely to gain access to credit from these small 

banks. Although the survey results show differences 

between small and large banks that suggest the 

possibility that less established small businesses 

may benefit more from the approach used by small 

banks, the results also indicate a high degree of 

commonality between the approaches taken by the 

two sizes of banks. 

63 However, the significance of the difference between the shares of small and large banks that consider additional documentation or business characteristics cannot be reported, because the number of large banks doing so falls below the threshold for 

protecting respondents’ identities. 

64 This diversity mirrors the varied ways in which small banks describe their small business borrowers (as discussed in Section 2), 

and may reflect how small banks are more attuned to the local economic environment or to the individual borrower. 

The survey supports the understanding that small 

banks are relationship lenders and approach small 

business lending in a more flexible and customized, 

case-by-case way compared with large banks; and a 

result of this approach may be that less established 

firms are more likely to receive credit. Small 

banks are found less likely than large banks to use 

minimum loan amounts on their top products or 

to rely on standardized loan products. And small 

banks are more likely than large banks to accept real 

estate collateral, a practice that is consistent with 

small banks’ having a more intimate knowledge 

of their local communities. Further, small banks 

often lend to start-ups using the same underwriting 

criteria they use for established small businesses; 

alternatively, they often evaluate a wide set of 

additional information, including relationship-based 

soft information such as owner’s experience or the 

management team’s skills.

The survey also supports the understanding that 

large banks are transactional lenders and rely on 

standardization in their small business lending 

decisionmaking, thus facilitating a high-volume, 

economies-of-scale business model and perhaps 

screening for more established firms—the ones 

most likely to meet the standards and to have the 

quantifiable data to show that they do. Large banks 

are much more likely than small banks to evaluate 

business credit score, require minimum loan 

amounts, and use such standardized loan products 

as credit cards. Further, when large banks do lend 

to start-ups, the criteria they use are almost always 

different from the criteria they use for established 

small businesses, particularly with respect to 

requests for outside guarantees.

Yet, despite the findings suggesting that small and 

large banks use distinct models for small business 

lending, there are also notable areas of commonality. 

The most surprising commonality is that for 

both sizes of banks, existing relationships are a 
48 FEDERAL DEPOSIT INSURANCE CORPORATION

Section 5

dominant reason for allowing exceptions to loan 

policy. In addition, small and large banks generally 

offer the same types of loan products, use similar 

underwriting criteria to evaluate small business 

borrowers, and accept the same collateral, with a few 

exceptions. Thus, although small and large banks 

may approach small business lending using distinct 

business models, as seen in Section 4 and as shown 

here, the process appears to involve many common 

elements and be somewhat relational in nature for 

both small and large banks.