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Reports Banking and SME Financing in the United States
Reports, Banking, and, SME, Financing, in, the, United, States
Banking and SME Financing in the
Washington, D.C.20416
charles.ou@sba.gov
This paper was originally presented at the conference on “International Comparisons in
the Financing of SMEs in Developed Nations” at the Warwick School of Business,
University of Warwick, Coventry, UK, April 4-5, 2006. The statements, findings,
conclusions, and recommendations found in this study are those of the authors and do not
necessarily reflect the views of the Office of Advocacy, the United States Small Business
Administration, or the United States Government.
June 2006                                                                                                                        No. 277
A Working Paper by Charles Ou, Ph.D.,
Office of Economic Research, Office of Advocacy, June 2006. 38 pages.
Background                                                              Highlights
Commercial banks have been the leading supplier of                         • With more than 6,000 banks and BHCs serving
debt capital to small firms in the United States. With                  millions of small business owners, the small business
the increasing availability of small business lending                   loan markets in the United States are made up of hun-
statistics and of research on the topic, it becomes                     dreds or even thousands of submarkets varying in size
possible to provide an overview of the small busi-                      and borrower characteristics. Many of these markets
ness loan markets in the United States, as well as an                   are segmented, with various degrees of intermarket
evaluation of the impact of major developments on                       connection in the flows of funds.
the cost and availability of loans to small businesses.                    • Competition in different submarkets also varies
The paper begins with a brief discussion of the                     significantly—from highly competitive credit card
market—the borrowers, lenders, and market orga-                         markets for small businesses at the national level, to
nization—followed by a discussion of major devel-                       fairly competitive markets in major urban centers,
opments in U.S. financial markets and the banking                       to markets with very limited competition in remote
industry. Topics discussed include innovations in                       rural areas and/or for specific ethnic groups.
information technology and in financial modeling                           • The emergence of a nationwide market for small
and financial products, as well as banking consolida-                   business credit lines and credit cards over the past
tion and the growth of interstate banking. The impli-                   decade is a significant development in small busi-
cations of increased competition in small business                      ness financing. The number of small business loans
loan markets as evidenced by the emergence of a                         outstanding (loans under $100,000) increased from
nationwide market for credit lines and business credit                  about 5 million in 1995 to 14 million in 2004, com-
cards, and the entry of regional and national banks                     pared with much smaller increases in larger small
and bank holding companies (BHCs) into local mar-                       business loans, up from 1 million in 1995 to 1.7
kets are discussed.                                                     million in 2004. Most of the increases came from
15 to 20 multi-billion-dollar banks and BHCs; they
Overall Findings                                                        accounted for more than 50 percent of the number of
loans under $100,000 outstanding. Fourteen banks/
Loan markets for most small business borrowers in
BHCs have extended business loans in more than 40
the United States have become more competitive
states, according to the 2003 database of information
over the past decade, evidenced by the emergence
submitted by banks as required by the Community
of a nationwide market for credit lines and credit
cards and the entry of large regional banks in local
• The entry of large regional banks into local
markets. However, the impact of increased competi-
markets also increased market competition in local
tion on the cost of funds to small firms, as indicated
small business markets. In 2003, of 370 banks/BHCs
by the rate spreads between small business rates and
that made larger small business loans (loans between
the rates paid by the banks’ best prime customers, is
$100,000 and $1 million) in more than one state, 34
more difficult to assess because of data limitations.
have lending activities in more than 10 states.
This Small Business Research Summary summarizes one of a series of research papers prepared by the U.S. Small Business Adminis-
tration’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.
• It is more difficult to study the impact of       Ordering Information
increased competition on interest rate spreads         The full text of this report and summaries of other
between small business loans and loans to the banks’   studies performed under contract with the U.S. Small
best customers. The prime rate served as the proxy     Business Administration’s Office of Advocacy are
for the rates charged to banks’ best customers in      available on the Internet at www.sba.gov/advo/research.
earlier years, but prime customers have generally      Copies are available for purchase from:
been charged rates below prime since the 1990s.           National Technical Information Service
Information on the rate premium over the base (or         5285 Port Royal Road
the index) in the rate adjustment formula of loan         Springfield, VA 22161
agreements would be most useful to an understand-         (800) 553-6847 or (703)605-6000
ing of this issue.                                        TDD: (703) 487-4639
www. ntis.gov
Scope and Methodology                                     Order number: PB2006-108500
The databases used for the analysis include Reports       Pricing information:
of Condition and Income (call reports), reports sub-            Paper copy, A04 ($29.50)
mitted under the requirements of the Community                  Microfiche, A01 ($14.00)
Reinvestment Act (CRA reports), and Statistical                 CD-ROM, A00 ($22.00)
Release E.2—the Survey of Terms of Business                     Download, A00 ($17.95)
Lending conducted quarterly by the Federal Reserve        To receive email notices of new Advocacy
Board. Studies on small business lending using         research, press releases, regulatory communications,
these databases, including, for example, the Office    and publications, including the latest issue of The
of Advocacy’s annual banking studies (available at     Small Business Advocate newsletter, visit http://web.
http://www.sba.gov/advo/research/banking.html),        sba.gov/list and subscribe to the appropriate Listserv.
are reviewed and summarized. Time series statistics
were generated for analysis of the trends in small
business lending by banks.
Advocacy’s data quality guidelines. More infor-
mation on this process can be obtained by con-
tacting the Director of Economic Research at
Defined in the broadest sense to include independent businesses with 500 or fewer hired
employees, U.S. small businesses numbered 23 million in 2003, employed about half of
the private sector work force, and produced about half of the nation’s private sector
output.1 Small firms are important to a competitive American economy because they fill
niches in both input and output markets, innovate, and contribute to the dynamism in
American industries and the U.S. economy.
The small business population in the United States
Because of the lack of a nationwide business registration and deregistration system in the
United States, tracking the small business population and its dynamic changes has been a
challenging task. Only recently, a more comprehensive annual national profile of the
business population, and thus the small and medium-sized enterprise (SME) population,
has become available.2
See U.S. Small Business Administration, Office of Advocacy, The Small Business Economy, various
editions, and “Small Business Frequently Asked Questions” at http://www.sba.gov/advo/research/.
While the annual profile of employer firms has been available for some time, the annual profile of
nonemployer firms was made available to the public only in January 2001 for the year 1997. See U.S.
Department of Commerce, Bureau of the Census, www.census.gov/epcd/nonemployer/view/pressrel.html.
Table 1 Measures of the U.S. Small Business Population, 2003 (millions)
Employer firms (nonfarm)                                                               5.7 e.
Nonemployer firms                                                                      18.0
Total                                                                                  23.7
Number of nonfarm business tax returns                                                  27.0
Number of Sole Proprietorships (IRS) in 2002                                            18.9
Self-employment, nonincorporated                                                        10.3
Self-employment, incorporated                                                            5.0
e. = estimated
Sources: U.S. Small Business Administration, Office of Advocacy, from data provided by the U.S. Department of
Commerce, Bureau of the Census; U.S. Department of the Treasury, Internal Revenue Service, SOI Bulletin; and U.S.
As of 2003, the number of U.S. businesses (and thus small businesses) totaled 23 million,
including 5.7 million employer firms and 18 million nonemployer firms (Table 1).3
Employer firms have employee(s) and participate in payroll tax withholding programs
(identified by employer identification numbers or EINs). Nonemployer firms have no
employees but file business tax returns with the Internal Revenue Service (IRS) of the
U.S. Department of the Treasury. Other frequently mentioned measures of the U.S. small
business population include the number of business tax returns filed with the IRS and the
self-employed. Tax return data include filings of subsidiaries of larger companies—a fact
that means large companies are reported numerous times—as well as the individual
business returns of numerous very small business entities. Self-employment is a work
force population concept. Thus, the two estimates of the business population are not
comparable—for example, the total of 16 million nonemployer firms reflects a universe
that is somewhat different from the 15 million self-employed owners of incorporated and
unincorporated businesses.4
See also op. cit., “Small Business Frequently Asked Questions,” June 2004 edition.
Examples would be an S corporation with five owners or a five-person partnership with one or no
While the sheer number of small businesses is huge, a substantial number of these firms
are very small, many generating annual receipts of less than $10,000.5 Even among “full-
fledged” businesses with hired employees or self-employed businesses that provide a
full-time career to the owner(s), different types of businesses are observed—from young
dynamic ventures involved in innovative products to established small businesses serving
local or regional markets, and from established subcontractors of large multinational
corporations to “mom and pop” small craft, retail, and service businesses. The business
goals and motivations of these businesses are different, as are their financial strategies
and financing behaviors.
The dynamics of small firms
The relative position of small businesses in the U.S. economy tends to remain constant
over time; that is, they continue to account for 99.7 percent of all businesses and employ
slightly more than 50 percent of private nonfarm workers. Nevertheless, the gross
movements in the number of businesses and employment are huge, with constant flows of
business births and deaths and with expansions and contractions in employment. These
movements demonstrate the dynamics of business change and competitiveness in the
American economy. Only with a continuous flow of new firms entering the market can
an economy assure that an adequate number of “successful” startups emerges to become
“gazelles” or small, nimble, fast-growing businesses.
In sum, SMEs in the United States6
•    Represent 99.7 percent of all employer firms;
•    Are very small, 75 percent having no employees;
•    Are more than 50 percent “home-based;”
•    Employ half of all private sector employees;
In 2002, 8.6 million of 18.9 million sole proprietorship returns reported receipts of less than $10,000. An
additional 5.9 million had $10,000 to $50,000 in receipts.
Op. cit. “Frequently Asked Questions,” and Brian Headd, “Business Success: Factors Leading to
Surviving and Closing Successfully,” U.S. Bureau of the Census, Center for Economic Studies, Working
Paper #CES-WP-01-01, January 2001; also, Analyses of Business Dissolution by Demographic Category of
Business Ownership, Advocacy-funded research by Richard J. Boden (see
http://www.sba.gov/advo/research/rs204.pdf).
•   Pay 44.3 percent of total U.S. private payroll;
•   Contribute 60 to 80 percent of net new jobs annually;
•   Contribute more than 50 percent of nonfarm, private gross product originating
(GPO) in private business;
•   Exhibit annual startup and closure rates (for employer firms) of about 10 percent
of the total population—in 2003 there were 572,900 new employer firms and
584,800 closures;
•   Declared, in total, between 35,000 and 52,000 bankruptcies annually over the
most recent 10 years, an indication that most small firm discontinuances caused
no losses to the creditors;7 and
•   Had about a two-thirds likelihood of surviving (as a new firm) for at least two
years and a 50 percent likelihood of surviving four years.
Financing Patterns of Small Firms
Small firms use a variety of financing sources for different purposes. The Federal
Reserve Board’s Survey of Small Business Finances (1998 SSBF and earlier surveys in
1993 and 1987) provides the most comprehensive database on the uses of credit and other
financial services by some 5.3 million small firms in the United States in 1998.8
Percentages of all small firms who used credit
More than 80 percent of all small businesses had used some kind of credit previously, and
thus had outstanding debt on their books at the end of 1998.9 Fifty-five percent of small
firms used traditional loans, while 71 percent used nontraditional sources, mainly
However, many small business failures showed up in the personal bankruptcy courts. See Robert M.
Lawless and Elizabeth Warren, The Myth of the Disappearing Business Bankruptcy. In
www.kauffman.org/pdf/eship_bankruptcy_061505.pdf.
See U.S. Small Business Administration, Office of Advocacy, Financing Patterns of Small Firms:
Findings from the 1998 Survey of Small Business Finances, September 2003 (see
http://www.sba.gov/advo/stats/ssbf_98.pdf - 1060.2KB ). The Federal Reserve Board has completed the
collection of financial information for 2003. The final edited database for the 2003 SSBF should be
available for public use in spring 2006.
Credit extended by a supplier is the debt of the borrower. For example, credit used by a small business
will show up as debt in the firm’s books. The terms “debt” and “credit” are therefore used interchangeably
owners’ loans and credit cards, for their credit needs.10 Among the different types of
credit used, credit cards (both personal and business), credit lines, and vehicle loans were
the most commonly used types or sources of credit. Forty-six and 34 percent,
respectively, of small firms used personal and business credit cards, 28 percent used
credit lines; and 21 percent, vehicle loans (Table 2).
Among financial institutions, banks are the most often used credit source for small firms:
38 percent of small firms had credit outstanding from commercial banks in 1998.
Owners’ loans were the second most important source, used by at least 14.2 percent of
small firms, an underestimate at that.11 Next, 13.3 percent of small firms used finance
companies as a credit source.
The smallest firms have much less access to bank financing than larger firms. Only 17 to
31 percent of firms in the two smallest size categories (with zero and 1 to 4 employees,
respectively) borrowed from commercial banks, compared with 53 to 77 percent of larger
small firms (Table 3).
Loans from a firm’s owners are among the most important sources of financing for most
small firms. However, reliance on owners’ loans was not well captured for all firms in the
survey because sole proprietorship owners’ capital was not considered debt financing and
was thus excluded.12 An examination of the borrowing patterns of small corporations
indicated that some 30 percent of small corporations borrowed from their owner(s),
compared with 14 percent of all small businesses.13
The percentage of small firms using credit increases with firm size. The percentage of
firms using any credit increased from 70 to 99.6 percent as the employment size of the
firms increased from 0 to more than 100. This trend is most pronounced in loans supplied
Traditional loans are the six types of loans covered in the survey: lines of credit, mortgages, vehicle
loans, equipment loans, leasing, and other loans. Loans from owner(s) and credit cards were covered
separately and thus considered nontraditional.
The importance of owners’ loans is underestimated because loans from sole proprietors were not covered
in the survey and were thus excluded. See the discussion in a later section.
Borrowing from owners by sole proprietorships is, by definition, equity rather than debt borrowing.
Table 2 Percentage of All Small Firms Using Credit, by Credit Type, 1998
Category                                  Any Credit
Any Firm                                     82.5         55.0             27.7              13.2        20.5          9.9         10.6     9.8       70.7              14.2           46.0              34.1
0                                            70.2         32.8             12.8               6.5        12.3          3.9          3.2      5.8      59.4               0.2           48.2              17.4
1-4                                          80.3         49.0             21.0              12.5        17.9          7.8          7.5      8.9      68.2              12.0           46.7              29.3
5-9                                          89.6         70.1             34.8              15.5        25.1         14.6         14.6      9.3      75.7              19.3           43.2              44.1
10 - 19                                      94.1         76.0             49.2              19.5        31.3         12.9         22.3     15.0      84.3              29.1           52.2              51.8
20 - 99                                      95.0         84.2             59.9              21.1        32.9         22.1         23.3     19.3      85.6              32.9           38.8              57.9
100 - 499                                    99.6         92.1             74.9              18.8        29.8         25.0         28.3     22.7      84.5              27.6           23.7              62.5
Mining and construction                      84.9         66.8             32.0              11.6        38.0         11.1          8.3     10.5      67.6              13.1           40.8              33.4
Manufacturing                                86.8         58.5             34.2               7.6        18.1         16.5         16.7     17.2      76.7              24.7           48.7              39.3
Transportation                               85.4         62.1             29.7              10.9        28.8         12.5         14.9     12.6      76.8              18.1           44.1              45.5
Wholesale trade                              88.4         64.3             47.3              12.1        27.8          9.8         10.5     10.5      82.9              21.6           45.8              46.3
Retail trade                                 78.3         54.1             25.2              17.4        17.8          7.7          6.4     10.1      62.3              14.0           41.0              29.9
Finance, insurance &amp; real estate             84.3         59.8             26.9              24.8        16.6         11.5         10.0      8.9      70.0              14.2           41.5              36.3
Services                                     81.4         48.8             23.1              11.5        16.0          8.8         11.6      7.9      71.6              11.1           49.9              31.7
Source: U.S. Small Business Administration, Office of Advocacy, &quot;Financing Patterns of Small Firms: Findings from the 1998 Survey of Small Business Finance,&quot; September 2003.
Table 3 Percentage of all Small Firms Using Credit, by Supplier of Credit, 1998
Depository Institutions                                             Nondepository Institutions                                                              Nonfinancial Institutions
Any Nondepository
Any Nontraditional
Any Nonfinancial
Any Depository
Category                             Credit
Any Firm                             82.5     55.0                    42.0               2.3               3.3      38.2                19.8               13.3                    0.4         6.8        1.5                      9.6                  6.0                  3.0                1.0           70.7                14.2           46.0                     34.1
0                                    70.2     32.8                    21.6               3.0               2.9      17.3                10.8               7.1                     0.5         2.5        1.5                      6.7                  3.6                  2.6                0.5           59.4                0.2            48.2                     17.4
1-4                                  80.3     49.0                    35.5               2.2               3.3      31.3                16.7               11.5                    0.3         4.8        1.5                      8.7                  5.7                  2.4                0.7           68.2                12.0           46.7                     29.3
5-9                                  89.6     70.1                    55.9               2.3               2.8      53.2                23.2               15.8                    0.3         9.6        1.5                      9.5                  5.6                  3.4                0.9           75.7                19.3           43.2                     44.1
10 - 19                              94.1     76.0                    62.5               3.3               3.9      59.0                33.2               19.7                    0.7         14.5       1.2                    13.8                   9.4                  3.4                1.6           84.3                29.1           52.2                     51.8
20 - 99                              95.0     84.2                    73.5               1.0               5.0      70.2                34.9               24.3                    0.8         12.4       1.9                    17.7                  10.5                  5.6                3.2           85.6                32.9           38.8                     57.9
100 - 499                            99.6     92.1                    77.9               0.1               3.4      77.2                45.4               27.5                    2.2         22.7       1.8                    12.4                   6.5                  4.3                2.6           84.5                27.6           23.7                     62.5
Mining and construction              84.9     66.8                     55.4              3.7               3.0      50.3                22.5               18.5                    0.7         3.4        1.2                      6.4                  3.3                  2.7                0.9           67.6                13.1           40.8                     33.4
Manufacturing                        86.8     58.5                     46.0              1.9               2.7      42.2                21.0               12.6                    0.6         9.7        0.8                    15.3                   9.1                  5.3                1.5           76.7                24.7           48.7                     39.3
Transportation                       85.4     62.1                     44.2              4.7               2.5      39.3                27.5               19.5                    0.3         8.9        2.1                      9.5                  6.2                  2.8                0.0           76.8                18.1           44.1                     45.5
Wholesale trade                      88.4     64.3                     51.2              3.4               4.3      46.1                25.0               14.6                    0.7         9.6        1.7                    10.4                   6.9                  2.0                1.7           82.9                21.6           45.8                     46.3
Retail trade                         78.3     54.1                     42.7              0.8               3.3      40.3                15.0               10.5                    0.1         3.8        1.8                      9.5                  5.4                  3.0                1.7           62.3                14.0           41.0                     29.9
Finance, insurance &amp; real estate     84.3     59.8                     46.9              3.1               5.9      41.6                16.3               10.8                    0.0         6.7        2.9                    11.3                   8.3                  2.9                0.0           70.0                14.2           41.5                     36.3
Services                             81.4     48.8                    34.9               2.2               3.0      31.4                19.9               12.8                    0.5         7.9        1.3                      9.1                  5.8                  2.8                0.7           71.6                11.1           49.9                     31.7
Source: U.S. Small Business Administration, Office of Advocacy, &quot;Financing Patterns of Small Firms: Findings from the 1998 Survey of Small Business Finances,&quot; September 2003.
by depository institutions (banks, thrifts, and credit unions). For example, only 22 percent
of firms with no employees used credit from depository institutions, while 78 percent of
firms with more than 100 employees did so.14
Two distinct patterns were observed in the relationships between firm size and the
percentage using a certain type or supplier of credit. The positive relationship between
firm size and the percentage used is observed for most commonly used credit types and
sources, and seems to reflect their availability to larger small firms. These types of credit
become more available as firm size increases. A flat or even inverse relationship between
firm size and the use of a type or source of credit—as observed with owners’ loans and
personal credit cards—reflects a different phenomenon: the need of very small firms to
use alternative sources because other, usually less expensive, sources of financing are
The relative size of each market, as indicated by the value of debt outstanding, is shown
in Table 4. Lines of credit and commercial mortgages are the two largest markets,
accounting for more than 60 percent of the total debt outstanding for these small firms at
the end of 1998.15
In conclusion, a multitude of small business loan markets exist in the United States,
serving small firms of varying sizes with different financial characteristics and financing
preferences.16
Op. cit., Financing Patterns…, Table A,11.
Since credit lines are mostly provided by depository institutions, the rising trend in their use relative to
firm size is even more significant. Thirteen percent of the smallest firms use them; 75 percent of the largest
small firms. Ibid., Financing Patterns…
Total debt outstanding was about $700 billion for 5.3 million small firms. Trade credit was not included
They range from small local markets to larger national/regional markets for different loans. Also, there
are markets for special groups of borrowers or in special areas—loans for startups, loans for women
owners, loans for small rural communities or central city business owners, etc.
Table 4 Share of Total Debt Outstanding for All Small Firms in the United States, by Credit Type, 1998 (Percent, except as noted otherwise)
Any Traditional                                                                                             traditional                  Any Credit
Category              Any Credit        Loan        Line of Credit   Mortgage        Vehicle         Equipment     Lease          Other            Loan        Owner Loan      Card
Amount ($ million)                   $700,026         $608,730       $207,383      $213,534        $33,654          $58,545      $35,521        $60,093         $91,296        $86,525        $4,771
Any Firm                                100.0              87.0          29.6           30.5               4.8          8.4            5.1            8.6           13.0          12.4           0.7
0                                       100.0              97.8            4.1          80.3               6.3          2.0            1.9            3.3            2.2           0.2           2.0
1-4                                     100.0              81.3          21.4           37.4               7.7          3.5            3.3            8.0           18.7          16.2           2.6
5-9                                     100.0              86.0          23.5           39.1               5.9          5.6            3.9            8.0           14.0          13.2           0.8
10 - 19                                 100.0              89.0          29.5           28.4               6.0          8.8            8.8            7.4           11.0          10.5           0.6
20 - 99                                 100.0              83.7          28.6           26.7               3.5         10.5            5.8            8.6           16.3          16.2           0.1
100 - 499                               100.0              93.3          44.0           20.5               3.1         10.8            3.9          10.9             6.7           6.7           0.0
Source: U.S. Small Business Administration, Office of Advocacy, &quot;Financing Patterns of Small Firms: Findings from the 1998 Survey of Small Business Finance&quot; September 2003.
Major Credit Suppliers in the Small Business Loan Markets
The 1998 SSBF also provides a comprehensive profile of financial lenders in the small
business loan markets for some 5.3 million established small firms.17 Table 5 provides a
profile of major participants in different small firm loan markets in 1998.18
•    The credit line market is dominated by commercial banks, which supplied 87
percent of the total debt outstanding held by small firms at the end of 1998.
Finance companies were a distant second, accounting for 10 percent of total
•    In the commercial mortgage markets, commercial banks supplied 57 percent,
followed by other nondepository institutions (18 percent), finance companies,
and savings and loans.19
•    Banks and finance companies accounted for more than 90 percent of the market
for vehicle loans.
•    In equipment loans, again commercial banks dominated the market, with 59
percent, while finance companies accounted for 26 percent.
•    The leasing market is the only one in which commercial banks ranked second,
behind leasing companies—with 39 percent for leasing companies, 27 percent for
banks, and 18 percent for finance companies.
To conclude, commercial banks are the most important lenders in most small business
loan markets. However, except with credit lines (and business credit cards), nonbank
lenders—namely, finance companies, mortgage lenders, and leasing companies—have
Again, current information on small business lending by credit suppliers is not available in the United
States, except for bank loan data, which are available only by loan size.
George Haynes, Finance Companies and Small Business Borrowers: Evidence from the 1993 and 1998 Surveys of
Small Business Finances, prepared for the U.S. Small Business Administration, Office of Advocacy, April 2005, online
at http://www.sba.gov/advo/research/rs255tot.pdf - 347.2KB.
Most savings and loan (S&amp;L) institutions converted or merged to become a part of federal savings banks
in the early 1990s after the S&amp;L debacle of the late 1980s.
Table 5 Share of Aggregate Value of Traditional Debt of Small Firms Held by Major Lenders, by Credit Type, 1998 (Percent, except as noted)
Lending Sources                                              Line of credit           Mortgage              Vehicle          Equipment                 Lease     Other loans    All
Aggregate amount ($ million)                                        207,383             213,534              33,654              58,545              35,521          60,093    608,729.65
Commercial bank                                                       86.60               57.36               49.83               59.05                27.06          51.09           64.68
Finance company                                                         9.74               8.46               39.65               26.44               18.15            2.49           12.32
Credit union                                                            0.15               0.72                3.39                 0.22                0.28           0.37            0.57
Savings and loan                                                        1.00               7.69                1.23                 0.11                0.59           1.70            3.32
Brokerage                                                               0.31               0.09                0.03                 0.07                0.94           0.75            0.27
Leasing                                                                 0.05               0.03                2.08                 3.65              39.30            0.08            2.79
Other nondepository                                                     0.16              17.06                0.11                 0.04                0.07           0.65            6.11
Family                                                                  0.00               3.86                0.85                 0.39                0.99          31.27            4.58
Other business                                                          0.15               0.30                0.31                 1.62              10.32            7.16            1.64
Government                                                              0.20               1.24                0.00                 1.59                0.06           3.47            1.00
Other individual                                                        0.05               0.75                0.11                 0.00                0.06           0.26            0.32
Others not identified                                                   1.60               2.45                2.42                 6.82                2.18           0.71            2.39
Total                                                               100.00              100.00              100.00              100.00              100.00          100.00       100.00
Source: U.S. Small Business Administration, Office of Advocacy, &quot;Financing Patterns of Small Firms: Findings from the 1998 Survey of Small Business Finances,&quot;
been active players in the markets and have helped maintain competition in many small
business loan markets in the United States.20
Developments in the Banking Sector and Bank Lending to Small Firms in the U.S.
As noted, except in leasing, commercial banks are the most important small business
financing market participants, accounting for 50 to 87 percent of total debt supplied to
various small loan markets. Limited current information about bank lending to small
firms has been available from call reports (June Reports of Condition and Income) since
1994 and from CRA reports (reports required under the Community Reinvestment Act)
since 1997.21
Major developments that have contributed to changes in the performance of the small
business loan markets over the past decade include:
•   innovations in the financial markets contributed by technology, especially in
information collection, processing and distribution, and financial modeling;
•   banking consolidation and a decline in the number of banks in the United States;
•   globalization in the financial markets among industrialized nations.
Impacts of innovation in financial markets on the sources of funds by financial
Innovations in U.S. financial markets during the past several decades have been
significant. New products and services have been developed by different financial
institutions to collect savings from individual households and businesses to lend to and/or
In fact, it is the nonbank lenders that helped maintain competition in small business loan markets in spite
of increased concentration in the banking sector. See Craig and Hardee, The Impact of Bank Consolidation
on Small Business Credit Availability, prepared for the U.S. Small Business Administration, Office of
Advocacy. Available online at http://www.sba.gov/advo/research/rs234.pdf - 92.7KB.
Information is available only for loan sizes of under $100,000, $100,000 to $250,000, and $250,000 to $1
million. No information is available about business entities, loan types, and loan terms. See Advocacy’s
annual banking studies, such as Small Business and Micro Business Lending in the United States., for Data
Year 2002-2003, released March 2005. Available at http://www.sba.gov/advo/research/sbl_03study.pdf.
invest in governments, businesses, and households.22 Since most small businesses and all
households rely on financial intermediaries for financing—residential mortgages,
automobiles, personal finances and credit cards for households; and credit lines, vehicle
loans, and commercial mortgages for small businesses—the impact of developments in
the financial markets on the availability of sources of funds to financial intermediaries
becomes critical to the growth of small business loan markets. Most nondeposit financial
institutions such as finance companies rely on the public markets for funding of their
business lending; most depository institutions—banks, savings banks, and credit
unions—have experienced drastic declines in deposits as the source of funding for
lending.23 Credit scoring, which allows lenders to access their borrowers’ credit profiles,
especially their credit history, is one major innovation that should contribute to the
growth of small business loan markets.
In spite of a large decline in the number of banks in the United States, in part because of
numerous merger and acquisition (M&amp;A) activities among banks/BHCs of all sizes over
the past 10 to 15 years, the U.S. banking system is still the least concentrated banking
system in the industrialized world.24 As of June 2004, there were some 6,500 banks and
BHCs in the United States.25 The 72 multi-billion-dollar banks and BHCs with domestic
assets in excess of $10 billion held 75 percent of domestic assets, but accounted for less
than 50 percent of small business lending (business loans under $1 million) as of June
2004. Many of these giant banks maintained vast numbers of retail branches across the
nation, while several were concentrated in wholesale business lending and international
The growth of private and public pension funds, mutual fund companies, and other institutional investors,
as well as various credit products packaging loans of different risk brackets has encouraged the growth of
public capital and credit markets far exceeding that of financial intermediaries in channeling savings to
Innovations that allow depository institutions to access public funding markets through asset
securitization have found very limited success when small business loans are involved because of the
difficulties in packaging small business loans, characterized by widely different risk and loan terms.
See discussions on the markets in Japan and the United Kingdom at the conference for which this paper
was prepared, “International Comparisons in the Financing of SMEs in Developed Nations,”
http://www2.warwick.ac.uk/fac/soc/wbs/conf/int-sme-finance/.
See U.S. Small Business Administration, Office of Advocacy, Small Business and Micro Business
Lending for 2003 -2004, at http://www.sba.gov/advo/research/rbsbl04.pdf. Call report data were
banking.26 An additional 645 medium-sized banks/BHCs (with assets between $500
million and $10 billion) operated in multi-state regional space. The remaining 5,600
banks/BHCs with domestic assets under $500 million served local and within-state
markets (Table 6). As the number of banks decline and many giant interstate or regional
banks and bank holding companies (BHCs) emerge, more products and services are
offered by more banks and nonbank institutions in different markets and locations, and
banking competition in national and regional markets intensifies.27
Trends in bank lending to small businesses, 1995-2004
As of June 2004, a total of 15.3 million loans outstanding of less than $1 million each,
valued at a total of $522 billion, were owed by small businesses to commercial banks.
More than 13.6 million of these, valued at a total of $125.7 billion, were in the smallest
loan category under $100,000, and most of these were business credit card-related. Table
7 provides an analysis of the changes over the decade.28
One perennial concern about banking consolidation has been its implications for small
business lending, because of the relatively small share of small business loans in the asset
portfolios of most giant banks. Table 8 provides a comparison of the relative importance
of small business lending for banks and BHCs of varying sizes since June 1997. The
following findings are observed:
•   Small business lending seems to have kept pace with overall growth in
business lending. The declining share of the amount in the smallest size
category (under $100,000) could be just a statistical phenomenon because of
consolidated for all BHC members to derive a total of 6,423 U.S. banks/BHCs in June 2004 (compared
with a total of 7,678 banks submitting June 2004 call reports to federal financial supervisory authorities).
The ratios of small business loans to total domestic assets for these banks, excluding American Express
Centurion, range from 0.0 to 0.194, with a median of 0.06 in June 2004. Op. cit., “Small and Micro
Business …2003-2004,” Table 1A.
See Berger and Udell, “Small Business Finance in the 21st Century,” in Office of Advocacy,
Entrepreneurship in the 21st Century: Conference Proceedings, March 26, 2004, available online at
http://www.sba.gov/advo/stats/proceedings_a.pdf.
Although not as comprehensive, flow data for the volume of loans made during a certain period have
been available in the CRA database since 1997. For example, the total number and amount of small
business loans (under $1 million) extended by some 998 CRA reporting bank/BHCs was 6.06 million
valued at $248 billion in 2003. Op. cit., Small and Micro Business… 2003 -2004.
Table 6 Total Assets and the Dollar Amount and Number of Business Loans Outstanding by Loan Size and Bank Size in the United States
June 2004 ( Dollar amounts in millions)
Loan Sizes                  Amount/N More than $50         $10 Billion to    $1 Billion to    $500 Million to $100 Million to Less than $100    Total
umber       Billion             $50 Billion       $10 Billion       $1 Billion     $500 Million      Million
Number of Banks/BHCs                                                 22                 45              272               357          2610             3188            6494
Loans Under $100.000 (SSBL)                   Amount              42.94              19.36           16.35               7.66          26.87           12.07        125.25
Number          7,256,934          1,906,568       2,009,451            914,965      1,078,196         412,465    13,578,579
Loans Under $250,000 (MSBL)                   Amount              71.04              35.11           36.17              16.31          51.71           17.96        228.30
Number          7,498,656          2,041,175       2,178,724            986,631      1,282,520         459,921    14,447,627
Loans Under $1 Million (LSBL)                 Amount             157.42              83.53           95.43              40.40         114.89           30.46        522.14
Number          7,738,184          2,176,272       2,346,248          1,053,664      1,452,222         495,599    15,262,189
Loans $100,000 to $1 Million (LSBL2)          Amount             114.49              64.17           79.08              32.74          88.02           18.39        396.90
Number            481,250            269,704         336,797            138,699        374,026          83,134     1,683,610
Total Business Loans (TBL)                    Amount             640.53             228.21          230.70              74.11         165.23           34.13       1372.91
Total Domestic Assets (TA)                    Amount            4214.79            1133.19          791.89             236.33         562.71          159.16       7098.07
Share of all bank/BHC
SSBL$                                         Amount                34.3              15.5             13.1               6.1           21.5              9.6           100.0
SSBL#                                         Number                53.4              14.0             14.8               6.7            7.9              3.0           100.0
MSBL$                                         Amount                31.1              15.4             15.8               7.1           22.6              7.9           100.0
MSBL#                                         Number                51.9              14.1             15.1               6.8            8.9              3.2           100.0
LSBL$                                         Amount                30.1              16.0             18.3               7.7           22.0              5.8           100.0
LSBL#                                         Number                50.7              14.3             15.4               6.9            9.5              3.2           100.0
LSBL $(2)                                     Amount                28.8              16.2             19.9               8.2           22.2              4.6           100.0
LSBL #(2)                                     Number                28.6              16.0             20.0               8.2           22.2              4.9           100.0
Total Business Loans                          Amount                46.7              16.6             16.8               5.4           12.0              2.5           100.0
Total Domestic Assets                         Amount                59.4              16.0             11.2               3.3            7.9              2.2           100.0
SSBL$/TBL                                      Amount             0.067              0.085            0.071             0.103          0.163           0.354            0.091
SSBL$/TA                                       Amount             0.010              0.017            0.021             0.032          0.048           0.076            0.018
LSBL$/TBL                                      Amount             0.246              0.366            0.414             0.545          0.695           0.892            0.380
LSBL$/TA                                       Amount             0.037              0.074            0.121             0.171          0.204           0.191            0.074
LSBL $(2)/TBL                                  Amount             0.179              0.281            0.343             0.442          0.533           0.539            0.289
LSBL $(2)/TA                                   Amount             0.027              0.057            0.100             0.139          0.156           0.116            0.056
Source: U.S. Small Business Administration, Office of Advocacy, annual banking studies, June 2004.
Table 7 Total Assets, Business Loans Outstanding by Size, and Loan-to-Asset Ratios for All Reporting Banks (June 1995-June 2004
2004              2003               2002                2001         2000        1999    1998*       1997*           1996        1995
SSBL$ (under $100k)**                             125.28             125.67            128.89              126.78       121.44      113.85      111.11      108.21      105.19      100.37
SSBL(Number)                                  13,579,962        14,093,016        15,651,289         10,794,555       9,802,330   7,726,928   7,018,226   6,725,646   5,313,182   4,885,066
LSBL$ (under $ 1million)                          522.33             495.11            483.99              460.42       436.98      398.45      370.46      348.71      333.04      315.91
LSBL(Number)                                  15,263,998        15,672,207        17,241,556         12,250,124      11,169,911   8,997,645   8,212,466   7,901,185   6,396,477   5,900,371
LSBL $(2) ($100k -&lt;$1 million)                    397.05             369.44            355.10              333.65       315.54      284.60      259.34      240.51      227.86      215.54
LSBL (2) (Number)                              1,684,036         1,579,191          1,590,267         1,455,569       1,367,581   1,270,717   1,194,240   1,175,539   1,083,295   1,015,305
Total Business Loans ($)                        1,373.27           1,318.10          1,306.95             1,324.52     1,300.27    1,142.33    1,019.19     923.24      848.10      805.99
Total Assets                                    7,100.75           6,607.42          5,912.04             5,548.33     5,229.59    4,736.23    4,419.40    4,046.39    3,766.85    3,556.66
Large business loans (&gt;$ 1 million)               850.94             822.99            822.97              864.10       863.28      743.88      648.73      574.52      515.06      490.08
SSBL$/TBL                                           0.091             0.095             0.099               0.096         0.093      0.100       0.109       0.117       0.124       0.125
LSBL$(2)/TBL                                        0.289             0.280             0.272               0.252         0.243      0.249       0.254       0.261       0.269       0.267
LSBL$/TBL                                           0.380             0.376             0.370               0.348         0.336      0.349       0.363       0.378       0.393       0.392
SSBL$/TA                                            0.018             0.019             0.022               0.023         0.023      0.024       0.025       0.027       0.028       0.028
LSBL$(2)/TA                                         0.056             0.056             0.060               0.060         0.060      0.060       0.059       0.059       0.060       0.061
LSBL$/TA                                            0.074             0.075             0.082               0.083         0.084      0.084       0.084       0.086       0.088       0.089
Number of reporting banks                           7,678             7,816             7,949               8,158         8,459       8659       8,966       9,293       9,670      10,149
* Adjusted for reporting errors.
** See Table 6 for definition of variables.
Source: U.S. Small Business Administration, Office of Advocacy, annual banking studies, various issues.
Table 8 Shares of Assets and Business Loans by Size for all BHCs/Banks in the United States by Bank Size
June 1997-June 2004 (Percent)
Asset Size of Banks/BHCs
$10 Billion    Total more      $1 Billion to                   Less than
Number of Banks/ Loan Sizes                  Amount/      More than      to $50 Billion    than $10        $10 Billion $500 Million to $500 Million
Number       $50 Billion                       Billion                       $1 Billon                   All Bks/BHCs
Number of Banks/BHCs                                                15              43             58             193             221          6821            7293
Under $100.000                                 Amount            17.48           13.51          30.99            15.76           6.83         46.41             100
Number            18.80           21.35          40.15            23.51           4.24         32.11             100
$100,000 to $1 Million                         Amount            24.64           22.20          46.84            19.52           7.30         26.34             100
Number            22.35           24.05          46.39            19.54           7.11         26.95             100
Total Business Loans                           Amount            38.83           27.49          66.32            14.98           4.13         14.57             100
Total Domestic Assets                          Amount            40.85           25.93          66.78            14.19           3.75         15.28             100
June/30/1999
Number of Banks/BHCs                                                15              44             59              224            234          6384            6901
Under $100.000                                 Amount            20.66           15.61          36.27            15.46           6.09         42.18             100
Number            25.89           24.98          50.87            18.04           3.59         27.49             100
$100,000 to $1 Million                         Amount            25.74           21.06          46.80            20.39           7.04         25.78             100
Number            24.91           21.61          46.52            19.82           7.05         26.61             100
Total Business Loans                           Amount            45.83           23.65          69.48            13.97           3.65         12.89             100
Total Domestic Assets                          Amount            46.68           23.01          69.69            13.50           3.39         13.42             100
June/30/02
Number of Banks/BHCs                                                19              45             64              233            321          5954            6572
Under $100.000                                 Amount            31.01           15.36          46.36            12.96           6.38         34.30             100
Number            38.27           21.69          59.96            21.04           6.42         12.58             100
$100,000 to $1 Million                         Amount            29.58           16.51          46.08            18.69           8.86         26.37             100
Number            32.01           16.18          48.18            18.05           8.37         25.40             100
Total Business Loans                           Amount            49.33           17.49          66.82            14.40           5.21         13.56             100
Total Domestic Assets                          Amount            55.53           17.78          73.31            11.55           3.69         11.45             100
June/30/04
Number of Banks/BHCs                                                22              50             72              300            345          5706            6423
Under $100.000                                 Amount            34.27           15.45          49.72            13.08           6.12         31.08             100
Number            53.44           14.04          67.48            14.81           6.74         10.98             100
$100,000 to $1 Million                         Amount            28.83           16.16          45.00            19.96           8.24         26.80             100
Number            28.58           16.02          44.59            20.02           8.24         27.15             100
Total Business Loans                           Amount            46.64           16.62          63.26            16.83           5.40         14.52             100
Total Domestic Assets                          Amount            59.36           15.96          75.32            11.19           3.33         10.17             100
the use of a fixed loan size category in a growing economy where average
loan sizes increase over time (Table 7).
•   A national market for small business credit lines and credit cards seems to
have developed, as indicated by a substantial increase in the number of the
smallest loans—a result of the nationwide promotion of small business credit
cards by giant interstate banks (Table 7).
•   The position of multi-billion-dollar banks/BHCs in the larger small business
loan markets (loans of $100,000 to $1 million) appears to be deteriorating.
Among the possible explanations are: 1. giant banks are concentrating on
credit card and credit line markets and thus neglecting the larger loan size
markets; 2. large banks have acquired more non-small business lenders, thus
increasing their asset shares without raising their small business loan share; 29
and 3. acquiring banks’ participation in local business markets after a merger
or acquisition is passive rather than active (Table 8).
Loan rates charged by commercial banks on small business loans
Small business loan rates charged by banks are affected by many factors—the size of the
market and thus the level of competition, the credit quality of the borrowers, the costs of
extending and administering small business loans, and the cost of money to the lenders.
The variables affecting the rates include the risk of the loans, loan size, collateral,
commitment, and many other loan underwriting terms. The Federal Reserve Board began
collecting information about the loan rates charged by commercial banks in the late
1970s, and has subsequently instituted several major revisions in data collection and
reporting formats. Statistical Release E.2 provides information on the rates charged by
banks to corporate and small business customers for the first week of February, May,
August, and November of the year. Small loan rates are used as a proxy for small
business loan rates. Effective weighted rates charged by banks are reported by risk
category of the loan and by repricing period.30 Information about other loan terms—such
See Joe Peeks, The Effect of Interstate Banking on Small Business Lending, prepared for the U.S. Small
Business Administration, Office of Advocacy, September 1997, available online at
http://www.sba.gov/advo/research/rs179.pdf - 82.4KB.
The Federal Reserve Board has reported effective loan rates by risk category since May 1998. Effective
rates by loan size continue to be reported in the E.2 Release, but with no reference to the repricing periods.
as the use of collateral, commitment, and the base rate used for adjustable loans—are also
reported for each loan group in the release. It is difficult to generalize about the rate
spreads between loans of different sizes and different risk groups as reported in Release
E.2 because, as discussed previously, small business loan markets are made up of
hundreds or even thousands of submarkets characterized by the size of the geographic
area in which different types of borrowers and lenders participate.31 Table 9 provides an
overview of the loan terms charged by commercial banks on business loans of different
sizes by large and small domestic banks.32
The following observations can be made about the terms of bank loans to small firms:33
1. Most small business loans are made in adjustable-rate loan arrangements—that is,
the rates are adjustable over the term of a loan on the basis of changes in the base
or index rate, which adjusts as market rates adjust. What this implies is that the
cost of borrowing to small businesses changes as the interest rates in the capital
and credit markets change. Small firms do not know the precise costs of
borrowing anymore. 34
Special tabulations on the rates by loan size and by repricing period have been made available to the U.S.
Small Business Administration, Office of Advocacy.
Moreover, since large loans make up a major share of the overall business loan markets, the estimated
shares, weighted by loan values, as provided in Release E.2, reveal limited information about the
characteristics of small business loans. In fact, it would be most revealing to look at the variation in the
rates charged to small firms.
Special tabulations, using a simple average rather than a value-weighted average, were provided by the
Federal Reserve Board to the Office of Advocacy for information on the percentages/share of loans with
collateral, pre-commitment, and using the prime as the base rate.
An econometric estimate for the rate determination would be the only way to identify the significant
factors explaining the difference between rates charged to small and large businesses.
This might indicate that they are more sensitive to changes in monetary policy. See William C.
Dunkelberg and Jonathan A. Scott, The Effect of Changes in Monetary Policy on the Expectations,
Spending Plans and Hiring Decisions of Small Business Owners, a report to the U.S. Small Business
Administration, Office of Advocacy, under contract number SBAHQ-04-M0450, available at
http://www.sba.gov/advo/research/rs267tot.pdf - 645.7KB.
Table 9 Survey of Terms of Business Lending, E.2, November 7-11, 2005 Percent, excepted as noted
Weighted average-maturity 5
Prime based (%) Not value-
Average months since rate
Made under commitment
weighted ***
Maturity/repricing interval
By large domestic banks                                                                                                                                                                                                     By small domestic banks
1. All C&amp;I loans                       6.07                            29,784                        55.3                            45.3                    88                               7.53 3,971 1,020                                                                                  87.1                            66.7                    77                                     7.1                     72.2
2. Minimal risk                        4.79                               666                        42.1                            37.5                  78.3                               7.26   138 1,143                                                                                  93.4                            63.3                  47.1                                     2.2                     77.1
3. Low risk                            5.04                             3,721                        21.8                            19.3                  75.2                               7.15   465 1,131                                                                                  78.3                            65.3                  78.4                                       9                     73.5
4. Moderate risk                       6.04                            12,888                        46.8                            41.2                  88.7                               7.52 1,593   904                                                                                  86.4                            76.5                  79.2                                     7.5                     68.7
5. Other                               6.55                             8,066                        84.4                            56.1                  94.6                               7.82 1,074 1,245                                                                                  95.2                            70.8                  78.7                                     5.9                     86.1
Zero interval                         6.56                             9,870                        54.5                            71.4                  90.7                               7.56 1,428   605                                                                                  86.5                            85.1                  87.7                                     8.3                       89
7. Minimal risk                       5.01                               155                        47.2                            63.6                  98.6                                  8    13 3,545                                                                                  94.4                            94.4                  99.8                                       0                     98.1
8. Low risk                           5.06                             1,283                        19.3                            23.6                  90.7                               7.42   149   435                                                                                  69.9                            87.6                  87.4                                     6.8                     93.7
9. Moderate risk                      6.71                             3,446                        51.7                            78.3                  95.1                               7.43   579   482                                                                                  82.1                            87.4                  87.4                                     8.6                     85.8
10. Other                              7.25                             2,570                        75.1                            78.9                  87.7                               7.87   443   577                                                                                  94.6                            94.2                  82.3                                       8                     96.1
Daily                                 5.89                             6,675                        45.1                            41.6                  73.8                                     7.6                       831                                  463                          88.8                            85.4                  81.5                                     8.8                     95.4
12. Minimal risk                        4.8                               265                        10.8                            50.4                  57.8                      ...                                ...                           ...                                 ...                             ...                   ...                             ...                                    95.4
13. Low risk                           4.89                             1,404                        15.6                            22.9                  48.9                               7.53                             91                                  290                          90.1                            94.1                  80.8                                  6                          95.1
14. Moderate risk                         6                             3,605                        48.3                            42.9                  77.9                               7.43                            399                                  691                            84                            86.7                  87.7                               10.4                          97.1
15. Other                              6.89                               628                        88.7                            47.2                  87.1                               8.11                            203                                  311                          96.7                            97.1                    83                                6.1                          90.8
2 to 30 days                          5.63                             6,668                        50.7                            19.4                    96                               7.07                            469                                  267                          73.3                            70.2                  94.8                                     6.4                     73.3
17. Minimal risk                       5.09                                39                        53.2                            39.4                  96.2                      ...                                ...                           ...                                 ...                             ...                   ...                             ...                                      61
18. Low risk                           5.11                               609                        44.8                             9.2                    91                      ...                                ...                           ...                                 ...                             ...                   ...                             ...                                    59.7
19. Moderate risk                      5.43                             3,820                        38.9                            15.3                  96.1                               7.56                            207                                  370                          90.7                             91                   95.4                                     0.3                       75
20. Other                              6.28                             1,653                        77.1                            27.1                  99.1                               7.69                             98                                  312                          99.9                             97                   99.2                                       8                       87
21. 31 to 365 days                     5.94                             3,960                        79.1                              38                    93                               7.66                            625 1,214                                                         87.8                            38.2                  54.6                                     5.8                     41.7
22. Minimal risk                       4.76                                75                        35.5                             2.6                    64                               5.46                             26   154                                                         67.3                             8.7                  85.7                                     5.3                     68.1
23. Low risk                           5.82                               234                        17.5                             7.2                    91                               7.27                             64   260                                                         92.9                            62.8                  72.3                                      10                     53.2
24. Moderate risk                      6.14                               889                        61.1                             9.4                  87.3                               7.91                            256 1,902                                                         91.1                            54.7                  49.5                                     9.6                     29.4
25. Other                              5.93                             2,525                        96.6                            54.3                  99.7                               7.42                            182 1,107                                                         90.1                            15.7                  52.7                                     1.6                     55.6
More than 365 days                     6.12                             2,262                        61.8                            30.7                  84.5                               7.56                            596                                        96                     95.9                             26                   53.8                                     1.5
27. Minimal risk              ...                                ...                           ...                             ...                   ...                             ...                                ...                           ...                                 ...                             ...                   ...                             ...
28. Low risk                           5.57                                75                        39.8                              24                  95.3                                7.1                            115                                  117                          85.7                            34.4                  59.5                                     2.3
29. Moderate risk                      6.07                             1,094                        40.7                            33.9                    80                               7.43                            141                                   56                            96                            27.9                  49.9                                     2.5
30. Other                              6.63                               601                        86.3                            49.7                  97.2                               7.86                            148                                  165                          98.4                            15.1                  80.4                                       1
Size of loan (1000)
31. 1 - 99                             7.14                             1,406                        87.6                            71.1                  91.4                          7.92 1,053       279     90.8     66.8     77.6      6.7
32. 100 - 999                          6.88                             5,868                        75.6                            72.5                  93.5                           7.6 2,213       301     89.6     69.3     77.2      6.2
33. 1,000 - 9,999                      6.27                            10,762                          59                            46.7                  92.7                          6.65     655     316     71.9     55.2     73.5     11.8
34. 10,000+                            5.35                            11,748                          38                            27.3                  80.6                      ...      ...     ...     ...      ...      ...      ...
Base rate of loan                                                Average loan size                                                                                                                Average Loan size
35. Prime                              6.94                        13,493      68.3                                                  266                   93.5                               7.79 2,648    111     90.9                                                                                                         71                   82.3                                       6
36. Other                              5.35                        16,291      44.6                                                  800                   83.5                                  7 1,322    667     79.4                                                                                                         74                   66.4                                     9.9
Source: Federal Reserve Board, Statistical Release E.2 Survey of Terms of Business Lending , November 7-11, 2005 ,12/ 13/ 2005.
*** special tabulations from the Federal Reserve Board.
2. The rate spreads and how the base rates change in response to changes in the rates
in the capital and credit markets provide better indicators of the relative costs of
borrowing to small firms compared with large borrowers.35
3. In general, the rate spreads differ by risk category, loan size, and size of the
lender—with differences of 2 to 2.5 percent between the minimal-risk group and
other groups; 1.5 to 2 percent between the smallest loans (under $100,000) and
the largest small business loans ($500,000 to under $1 million); and 50 to 75 basis
points between large domestic banks and small banks in the United States.
4. Most small business loans are made with the prime rate as the base rate.36 Since
the prime may not adjust as promptly to changes in the market rates, especially
when the market rates are falling, the rate spreads between small business loan
rates and the prime may differ significantly from the spreads in rates charged to
the bank’s best customers.
5. It is difficult to estimate the rate spreads over the base rate, the index rate that
changes as the market rate changes. The convention is that most small business
loans have a rate spread (rate premium) of 1 to 3 percent above the base rate.
However, the spreads over the rates charged to the banks’ best customers are
much higher. Chart 2 summarizes the rate spreads between small business loans
(for two loan sizes of under $100,000 and $100,000 to $500,000) and the average
prime rates, as well as the spread over the prime-customer rates (as defined in the
E.2 release). Rates for loans with 2-30 days repricing periods are used in this
i.    The negative rate spreads between larger small business loans
and the prime is a puzzle. It is hard to imagine an adjustable-loan
formula with a negative spread over the base stipulated in the
loan contract for this loan size. Several explanations are offered:
loans made by larger banks did not use the prime as the base rate
It would be revealing to know how the actual rates charged at the time of borrowing compared with the
rates charged on the basis of the formula in the loan contract. There is an incentive for lenders to use
“teaser rates,” rates below the rate based on the adjustable rate formula, when competition for borrowers is
strong. This practice is likely when market rates are rising or are expected to rise in the near future.
for their larger loans; prime rates used by larger banks are lower
than the market average during this period of falling interest
rates; large banks used ‘teaser rates,”—rates lower than the rate
determined by the formula.
ii.    The rates paid by the prime customers are 200 basis points below
the average prime rates in this period. Fluctuations in the spreads
between the prime and prime-customer rates were also observed
during this period—possibly an indication of rigidity in the prime
iii.    The spread between the smallest loans and the rates paid by
prime customers were 2.5 to 3.5 percent.
6. The repricing periods range from zero to 360 days. Two-thirds of small business
loans have a zero repricing period —that is, rates are adjustable as soon as the
base rate changes, as compared with a fixed interval adjustment, such as monthly,
quarterly, etc.37 Rate premiums over rates with shorter repricing periods were
observed only for loans with an over-360-day repricing period.
7. Most small business loans were made with collateral.38
To conclude, there is still much to learn about the rate spreads between the rates for
small business loans and the prime or the prime-customer rates. Information about the
rate spreads in a loan contract might be more useful than information about the actual
rates paid by borrowers at the time of borrowing. An econometric study on factors
affecting the rates or rate spreads using individual loan data would certainly be most
The prime has become more common as the base rate (the index) for small business loans than as the rate
charged to the banks’ best customers, as has been commonly assumed. The rates charged to the banks’ best
customers are usually below prime, especially when money market rates are low.
Some 80 percent of the loans have repricing periods of less than 30 days.
It is likely that this refers to loans other than business credit cards, which show huge increases in the
number of loans originated, but not in the dollar amount.
Competition and Performance of Small Business Bank Loan Markets in the United
The degree of competition in the small business loan markets in the United States differs
widely because of different degrees of participation in local markets by regional and
national lenders. Large national and super-regional lenders enter the local markets
through two channels—mass marketing through all public media and relationship lending
through the development of “direct” relationships between bank branch officers and
small business borrowers. The products/services marketed through the former channel
will be general-purpose loans with limited requirements on how and where the loan funds
are used. Loan applications are evaluated on the basis of the borrower’s and/or the
business’s credit history as well as other business financials. In the latter channel, for
special-purpose lending, specific knowledge of the borrower(s) as well the loan purposes
and the characteristics of collateral are required. Specific loan covenants might be
required and an effective monitoring process used to assure loan performance. Of course,
there are other loan types that use a combination of these two financing channels.
It is difficult to evaluate the performance of small business loan markets in providing
financing to small firms at “reasonable” prices because of the difficulty of defining the
market from the statistical information collected.40 The issue is further complicated by
limited information available for statistical analysis purposes.
Competition and performance in the small business loan markets in the United States will
be briefly discussed under three headings—the emerging nationwide market for credit
lines and credit cards for small businesses, competition in larger small business loan
markets, and interest rate spreads for small business loans over large business loans.
Community Reinvestment Act (CRA) data will be used to investigate the degree of
SSBF data have been much utilized to investigate small business lending practices of banks of different
sizes. For a review of all major research using the SSBF files, go to the bibliography of the SSBF section
on the Federal Reserve Board’s website.
This explains why complaints that small business credit markets do not work continue to be heard, while
most respondents to small business surveys indicate their satisfaction with the markets’ performance.
participation by large banks and BHCs in local markets.41 Two small business loan
markets are identified—the small credit line/credit card market, approximated by the
smallest loans (under $100,000), and the larger loan market for “special purpose” loans
such as nonresidential mortgages, equipment, and other loans.42 Entry into the local
markets by large regional and national banks provides the major impetus for increased
An emerging nationwide market for small business credit lines/business credit cards
With a maturing consumer credit card market and accumulated knowledge and
experience in credit scoring and credit card lending, large national and super-regional
banks have promoted and exploited small business credit cards over the past 10 years. As
discussed in the previous section, the number of the smallest loans under $100,000
showed a rapid increase in this period. Multi-billion-dollar banks/BHCs’ share of the
number of loans under $100,000 outstanding increased from 40 percent to 67 percent
between June 1997 and June 2004, as compared with relatively insignificant changes for
other measures of small business lending activities by these banks/BHCs (Table 8). A
study of the CRA data for 2003 indicated that 14 large banks/BHCs have participated in
the nationwide markets; these banks/BHCs had at least 10 loans in each of the 50 states in
200343 (Table 10b). Nationwide banks include such well known credit card banks as
Advanta, Amex, GE Capital, MBNA, and Atlantic Bank, and BHCs such as Bank of
America, Bank One, Citigroup, FleetBoston, U.S.Bancorp, Wells Fargo, etc. Most major
credit card banks participated only in the under $100,000 market, while the giant BHCs
participated in this and other small business loan markets with extensive branch
Only the CRA database provides information about the destination of a bank’s small business lending
activities. Op. cit., Small Business and Micro Business Lending in the United States for Data Years 2003-
The distinction is, indeed, not very precise. The special purpose market also includes the smallest loans
made by smaller banks, which include vehicle loans, lease improvement loans, etc., to small businesses.
While many banks reported loan activities in more than one state in the CRA, many show only one or
two loans in a given state for 2003. Of a total of 1,000 banks/BHCs in the 2003 CRA reports, many had
extended fewer than five loans in a given state. To exclude these “casual lenders,” banks with a significant
small business program in a given state are identified as those with more than 10 loans under $100,000 and
more than 5 loans of $100,000 to $1 million.
Table 10a Number of Banks/BHCs Made at Least Five Loans ($100,000 to $1 Million) in a given state, 2003
Number of states a bank extended loans                                          Number of Banks/BHCs
One state                                                                              633
2-5 states                                                                             300
6-10 states                                                                             33
more than 10 states                                                                     34
Total number of banks/BHCs                                                           1,000
Table 10b Number of Banks/BHCs Made at Least 10 Micro Loans ( less than$100,000) in a given state, 2003
One state                                                                              669
2-5 states                                                                             259
6-10 states                                                                             31
10-39 states                                                                            16
More than 40 states                                                                     14
Total number of banks/BHCs                                                             989
Note: Many loans under $100,000 may not be credit lines or credit card loans.
Source: Estimates derived from the CRA data for the year 2003.
Chart 1 offers a simplistic illustration of participation by banks/BHCs of different sizes in
these two markets. Two small business bank loan markets in Wisconsin are described—
for loans under $100,000 and between $100,000 and $1 million.44 The number of larger
loans made by a certain bank/BHC is plotted against the number of the smallest loans.
The market for small credit lines and credit cards is indicated on the horizontal axis. Here
the market is dominated by two groups of lenders—a small number of large credit card
banks that made a large number of loans in this market and no loans in the larger small
business loan markets, and several large regional and national banks/BHCs with
extensive lending in this and the larger loan markets.45 With extensive use of credit
scoring and other financial modeling and risk management tools, multi-billion-dollar
national banks/BHCs have promoted this general-purpose credit line market to become a
national market for small firms. This is the market in which large regional and national
lenders extend credit lines to small firms across the country.46 Competition in this market
is mostly oligopolistic—characterized by nonprice competition more than by price
competition. To the extent that the emerging credit card/credit line market promoted by
giant banks/BHCs contributes to the provision of new credit products for small firms, the
markets for small business loans and the availability of small business financing have
Entry into the local small business loan markets by large national and regional banks
The other small business loan market consists of different submarkets of varying sizes
with different geographical expansion—including markets for very small loans (under
$100,000) extended by small community banks in local markets, large vehicle loan
markets participated in by banks of all sizes as well as finance companies, markets for
commercial mortgage loans also offered by banks/BHCs of all sizes (except very small
Some 150 banks/BHCs reported small business lending in the State of Wisconsin in their CRA report in
2003. About 65 banks/BHCs which reported making 10 or more small business loans in Wisconsin in 2003
were plotted for examination. See CRA data in the Office of Advocacy report on Small Business and Micro
Business Lending…, various years.
The number of states in which these banks/BHCs have “extended loans” in a given year averages 35 to
45 states—an indication of the national market.
This is the market where personal and business finance are integrated with owners’ wealth and payment
history, constituting a major election in the credit review process.
banks) (Chart 1).47 Active participation by national and regional banks and BHCs in the
markets is indicated in Table 10a. Thirty-four national/regional banks and BHCs have
branches and loan offices in more than 10 states and make at least five small business
loans of $100,000 to $1 million in a given state.48 It is true that many of these
banks/BHCs obtained entry to the local markets through mergers and acquisitions of
existing banks and may not have added much to the total number of participating lenders
in a given market. However, by bringing funding sources from the national credit
markets, large banks’ entry into local markets creates a link to the national market.
While there is no good statistical measure of market competition in small business loan
markets, competition in banking markets generally (especially in deposits) has been the
subject of continuous investigation, especially by federal regulatory agencies. A
concentration ratio for the banking markets in the United States, the so-called Herfindahl
index (HHI), has been computed (using deposit distributions) by metropolitan statistical
area (MSA) and non-MSA county for 2004.49 Overall, banking competition in MSA
markets remained competitive,50 with little indication that banking consolidation has
significantly affected banking market competition. A review of changes in the index over
time also seems to indicate that most U.S. banking markets remained competitive.
To conclude, the markets for most small business loans have become more competitive,
especially for some loans, as the markets become regional and national in scope with the
entry of large regional and national banks/BHCs.
Another measure of market competition in the small business loan markets is the cost of
borrowing to small firms. As markets become more competitive, the premiums between
An examination of CRA data for the $100,000 to $1 million loan market in individual states reveals that
major lenders in this market were banks headquartered in the state and/or neighboring states.
As of June 2005, 11 banks/BHCs had more than 1,000 branches each, according to the Federal Deposit
Insurance Corporation (FDIC). See “Summary of Deposits—Top 50 Bank Holding Companies.”
Thanks to Dr. Wolken of the Federal Reserve Board for this calculation.
The HHI measurements for 361 MSAs for commercial banks ranged from 550 to 7,701, with a median of
1,677 and a quartile of 2,100. The index for rural counties ranged from 874 through 10,000 with a median
of 3,350 and a quartile of 5,000.
Chart 1: Scatter Diagram of the Numbers of Small Business Loans by Banks/BHCs in
(Smallest loans versus larger small business loans)
Larger small business loans ($100k to &lt;$ 1miliion)
0       2000          4000         6000             8000         10000    12000        14000
Smallest loans (under $100,000)
rates for small business loans and risk-free loans for prime customers should narrow
because of competition. While it is difficult to evaluate changes in the rate premiums paid
by small firms for bank loans over time, changes in the rate differentials between small
business loans, the prime rate, and rates charged to the banks’ best customers will be
analyzed.51
Rates charged for small variable-rate loans (with a 2-30-day repricing period) will be
analyzed. Changes in the rate spreads for small business loans over the prime rates and
the rates charged to prime borrowers (borrowers classified as risk-free) for the first
quarter 1998 through the fourth quarter 2004, are provided in Chart 2 (see also Table
11).52 Tentative findings are:
•    Overall, the spreads between small loan rates and the prime rate—the base
rate for rate adjustments in small business loans—range between 0 and 1.5
percent for loans under $100,000 and between 0.5 and -0.5 percent for larger
small business loans, with a slightly declining trend in both sizes over the
period.53
•    The spreads between rates for small borrowers and those for the banks’ prime
customers average between 2 and 2.5 percent for larger small loans and
between 2 and 4 percent for the smallest loans. However, there were wider
fluctuations in the movements and a substantial increase in the spreads over
the last two years of the present recovery.
•    As an index for most loans to small businesses, the prime tends to be rigid.
However, over the January 1998 through December 2004 period, the spreads
The cost of funds for small firms is affected by factors such as the terms, collateral, and financial
condition of borrowers, as well as the risk assessment of business lending by banks during different
business cycles. Moreover, with floating rate arrangements, small borrowers are bearing the risk of rate
changes. Furthermore, the relationship between the prime rate, especially the local prime, and rates charged
in the money markets has also changed, at least in the short term.
Since May 1997, loan rates have been grouped on the basis of varying degrees of risk and presented in
the Federal Reserve Board’s Statistical Release E.2. The Federal Reserve tabulates original data for use by
the Office of Advocacy to better reflect rates charged small firms (for loans under $1 million). This makes
the comparison of rate spreads for small loans over large loans over time difficult, if not impossible.
Overall, the premium over the prime rate rises slightly in periods of strong demand and decreases when
demand is weak and liquidity is ample in the banking sector, as in 2002-2004.
Chart 2. Rate Spreads for Business Loans by Commercial Banks, by Loan Size 1998-I — 2004-IV
4.00                                                                                                                                                                                                                                                                      (SSBL-
(MSBL-
1.00                                                                                                                                                                                                                                                                      (SSBL-Pm
(MSBL-Pm
-1.00                                                                                                                                                                                                                                                                      Customers)
Spread (Pm
Table 11 Annual Averages for Rate Premiums of Small Loans over Prime Rates (Percents)
(For smallest loans &lt;$100,000)
Year                                 Short-term floating **                Year                             Variable rate loans (2-30 days repricing)
1987                                          1.74
1988                                          1.75                         1998                                               1.26
1989                                          1.88                         1999                                               0.72
1990                                          1.91                         2000                                               0.50
1991                                          1.63                         2001                                               0.55
1992                                          0.58                         2002                                               0.50
1993                                          1.43                         2003                                               0.25
1994                                          1.15                         2004                                               0.06
1995                                          1.39
** Average of three smaller loan sizes before November 1997. No knowledge of repricing period for this period.
Source: Board of Governors of the Federal Reserve System, Statistical Release E.2; &quot;Survey of Terms of Business Lending,&quot; various issues.
of the prime over short-term money market rates (three-month Treasury bills
are the proxy here) ranged between 2.5 and 3 percent, except during the brief
period between fall 2002 and spring 2003, and in 2004 when interest rate
changes accelerated.
•    A look at the spreads between the prime rate and the rates charged to banks’
prime customers (risk-free loans), is most revealing. Banks have stopped
competing by changing prime rates. The rates paid by prime customers were 2
percent below the prime rate over this period. A comparison of the
movements in the spreads between small loan rates and rates for prime
customers and the spreads between the prime and the prime customer rates in
2004 indicated that banks have not been cutting loan rates to attract small
business borrowing—so, as the rate spreads between small loan rates and the
prime narrowed slightly, the spreads between small loan rates and the rates
paid by the banks’ prime customers rose over the past two years..
•   Although the 1986-1997 period and the 1998-2004 period are not strictly
comparable, a comparison was attempted of the rate spreads between the
smallest loans and the prime rates for the two periods.1 Table 9 summarizes
the results. On average, the spreads were higher in the earlier period—
between 1 and 2 percent—compared with 0.5 to 1.5 percent in the later period.
Again, the rate spreads increase about 50 basis points when the economy is
doing well and demand is strong, as in the 1986-1990 and 1998-2001 periods.
A brief note on loan rates for small business credit cards.
•   As a national/regional market served by some two dozen large competitors, the
small business credit card market is very competitive.2 Most competition,
however, is conducted on nonprice terms—banks compete by offering teaser
As discussed, the Federal Reserve Board began in May 1997 to group rates for floating-rate loans on the
basis of “repricing” periods—one day, 2 to 30 days, 31 days to 365 days, etc. Short-term rates for loans
reported before 1997 were for loan maturities under one year. No information on the repricing period is
indicated for these loans.
Major credit card issuers include American Express, MBNA, Capital One, Citicorp, Chase, Bank of
America, Bank One (before it merged with Chase), Wells Fargo, Advanta , etc. Many BHCs and financial
services holding companies have established a commercial banking entity or, more recently, a federal
savings bank to conduct credit card operations.
rates, different grace periods for no or low interest, airline mileage
advantages, and credit or cash discounts, etc. Consequently, most of the
interest rates charged, after the promotion period, by lenders are 5 to 6 percent
over prime rates, adjustable weekly or monthly. 56 The rates jump
immediately—to 19.99 percent or higher for most lenders—when a borrower
fails to make payments on time.
Small business banking consists of a multitude of markets of varying sizes serving the
different needs of different small business groups. While most small business bank loan
markets are small local markets, large regional or even national markets for small
business credit lines have also developed. Most major small business bank loan markets
in the United States have remained competitive or have become even more competitive in
spite of banking consolidation. The continued presence of a large number of profitable
community banks in many local and regional markets facing the encroachment of large
national and regional banks is testimony to the competition in the small business banking
markets in the United States. This explains why most small firms have indicated little
concern about the availability of credit over the past decade. However, banks continue to
compete on terms other than pricing—that is, competition in the small business loan
markets is characterized by mostly oligopolistic pricing. Declines in the cost of
borrowing to small firms over the past decade are mostly the result of ample liquidity
available to the banking industry and in the overall financial markets in the United States.
Obtained from a review of the terms contained in promotion materials sent by lenders.
Akhavein, Jalal, W. Scott Frame, and Lawrence J. White (2005). “The Diffusion of
Financial Innovation: an Examination of the Adoption of Small Business Credit Scoring
by Large Banking Organizations.” Journal of Business 28, 577-596.
Boden, Richard, Analyses of Business Dissolution by Demographic Category of Business
Ownership, Advocacy-funded research by Richard J. Boden. Available online at
http://www.sba.gov/advo/research/rs204.pdf
Berger, Allen N., and W. Scott Frame (2005). “Small Business Credit Scoring and Credit
Availability.” Working Paper 2005-10, Federal Reserve Bank of Atlanta.
Berger and Udell, “Small Business Finance in the 21st Century,” in Office of Advocacy,
Entrepreneurship in the 21st Century: Conference Proceedings, March 26, 2004.
Available online at http://www.sba.gov/advo/stats/proceedings_a.pdf
Craig, S. and P. Hardee, The Impact of Bank Consolidation on Small Business Credit
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Available online at http://www.sba.gov/advo/research/rs234.pdf.
Dunkelberg, William, and Jonathan A. Scott, “The Effect of Changes In Monetary Policy
on the Expectations, Spending Plans and Hiring Decisions of Small Business Owners,” A
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Available online at www.federalreserve.gov/; also in “Statistical Supplement to Federal
Reserve Bulletin,” Table 4.23.
Hannan, Timothy H., 2003. “Changes in non-local lending to small businesses.” Journal
of Financial Services Research 24, 31-46.
Haynes, George, Finance Companies and Small Business Borrowers: Evidence from the
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Business Lending? New Evidence from a Survey of Small Firms.&quot; Journal of Banking
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Lawless, Robert M. and Elizabeth Warren, The Myth of the Disappearing Business
Bankruptcy. In www.kauffman.org/pdf/eship_bankruptcy_061505.pdf.
Mester, L., 1997, “What’s the Point of Credit Scoring?,” Federal Reserve Bank of
Philadelphia Business Review, September/October, 3-16.
Nakamura, L. I., 1994, &quot;Small borrowers and the survival of the small bank: Is mouse
bank Mighty or Mickey?&quot; Federal Reserve Bank of Philadelphia Business Review, Nov-
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Joe Peeks, The Effect of Interstate Banking on Small Business Lending, submitted to the
U.S. Small Business Administration, Office of Advocacy, September 1997. Available
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U.S. Department of Commerce, Bureau of the Census, “Nonemployer statistics,”
Available online at www.census.gov/epcd/nonemployer/view/pressrel.html.
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Banking and SME Financing in the United States by Charles
Prudential regulations SME Financing
THE SME FINANCING ROUND TABLE
OERs Research on SME Financing in the U.doc
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