Small business lending: challenges and opportunities for community banks

The recent decline in small business lending (SBL) among U.S. community banks has spurred a growing debate about the future role of small banks in providing credit to U.S. small businesses. This paper adds to that discussion in three key ways. First, this research builds on existing evidence, suggesting that the decline in SBL by community banks is a trend that began at least a decade before the financial crisis. Second, the authors show that in the years preceding the crisis, small businesses increasingly turned to mortgage credit to fund their operations. Finally, this paper illustrates how community banks face an increasingly dynamic competitive landscape, including the entry of deep-pocketed alternative nonbank lenders using technology to find borrowers and to underwrite loans, often using unconventional lending practices. Although these lenders may pose a competitive threat to community banks, the authors explore emerging examples of partnerships and alliances among community banks and nonbank lenders.