4 Trends in Small Business Credit

Businesses with fewer than 500 employees account for 99.9% of US firms.  Overall there are over 6 million employer firms in the US (2006) with 600K new businesses forming every year.  Approximately 1.3 million businesses employ between ten and 1,000 employees, generating over $5 trillion in annual revenue.[i]

With profound community, national and international importance on the shoulders of small business, the following summary highlights 4 trends in US small business credit and lending.

1. General Credit Use

The banking system is the largest supplier of traditional (vs nontraditional) credit for small businesses in the US.  In 2003, total debt owed by small firms to commercial banks was $718 billion.  In the five years between 1998 and 2003, the use of small business credit increased by an estimated 10%.[ii]

Bottom Line – The gross majority of small US businesses use some form of credit.  Overall credit use increased significantly in the five years between 1998 and 2003.

2.  Credit Variety

In 2002 and 2003, 41% of small business owners said they used credit cards (personal or business) for business expenses.  However those obtaining startup financing through traditional bank loans were a mere 11.4%, with more than 60% using nontraditional self-financing to get started.  Six traditional loan types accounted for 90% of small business lending debt, of which 36% were mortgage loans and 29% were credit lines (the two largest credit types used by small businesses).[iii]

Bottom Line – Small businesses primarily obtain funding through nontraditional self-financing, credit cards, credit lines and mortgage loans (as opposed to traditional commercial and small business loans).

3. Loan Amounts

A 2007 study categorized US small businesses into three groups based on loan amounts:

Borrowers seeking (1) less than $100K, (2) $100K-$250K, and (3) $250K-$1 million.

Of the three categories, borrowers seeking less than $100K received approximately 88% of small business loans.  However, the total dollar  amount of these loans was only 23% of all small business lending.  Borrowers seeking $250K – $1 million represented a mere 5% of small business loans, yet accounted for 58% of dollars borrowed.

Furthermore, total dollars lent to firms seeking between $100K and $1 million increased at nearly twice the rate (143% increase) of loans for $100K or less (59% increase).[iv]

Bottom Line – As a population, there were more small firms seeking small loans.  However in terms of dollars, small business lending disproportionally favored fewer, larger firms seeking larger loan amounts.

4.  Loan Availability

The number of US loans made to small businesses peaked in the second quarter of 2008 at 27.2 million loans.  Since then the volume declined by 17.8% (a drop of more than 4.8 million small business loans).  During that time the total value of such loans fell by $60 billion, to approximately $650 billion.[v]

Bottom Line – Fewer small businesses are getting loans and the total value of small business loans has significantly declined.


[i]Source: US Census Data and Small Business Administration Office of Advocacy general statistics

[ii] Small Business Administration, Small Business in Focus: Finance; A Compendium of Research by the Small Business Administration’s Office of Advocacy, Office of Advocacy (July, 2009)

[iii] Small Business Administration, Small Business in Focus: Finance; A Compendium of Research by the Small Business Administration’s Office of Advocacy, Office of Advocacy (July, 2009)

[iv] Small Business Administration, Small Business in Focus: Finance; A Compendium of Research by the Small Business Administration’s Office of Advocacy, Office of Advocacy (July, 2009)

[v] Maloney & Schumer, Small Business Employment: Bank Lending Restrains Job Creation, U.S. Congress Joint Economic Committee (September, 2010)

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One Response to 4 Trends in Small Business Credit

  1. Bruce Murray says:

    Retained earnings are now a record-setting $2-trillion-with-a-T. The bottoming-out of Loan Amounts curve is certain to be a leading indicator of recovery as these cash reserves begin to be spent. Which of the two sectors will be the first to emerge – the <$100k or $100-250k?

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