A Loan in the Dark: The Difficulty of Determining Local Small Business Credit Needs

By William Dowling

It should come as no surprise that small businesses play an important role in the U.S. economy. There are 28 million small businesses operating throughout the country, and they are responsible for nearly half of all private-sector employment and 63 percent of new private-sector jobs. Therefore, maintaining an atmosphere in which these businesses can thrive is essential to the health of the economy.

Unfortunately, many small businesses were particularly hard hit by the Great Recession and are still recovering. As with any community development issue, understanding the data behind the problem is essential to formulating an effective solution. While we have access to robust, national data on small business lending, the local data on this topic are much more limited. Currently, there are two main sources of small business lending data:

  • Call reports, which are essentially a bank’s financial statements, include information on business loans under a $1 million but only at the national or institutional level.
  • Community Reinvestment Act data, which some banks are required to report pursuant to regulatory requirements, contain information on small business loans at the county and census tract levels but only for institutions with assets over $1.2 billion.

Although small businesses employ a variety of credit sources, the majority use bank loans as at least one of those sources, so understanding these trends gives us a valuable look into the overall health of small businesses. By cobbling these data along with Small Business Administration statistics together, we can get a rough view of local small business lending trends. Nevertheless, the supply-side of the picture is still incomplete, and unfortunately, we know even less about the demand side. Regionally, publicly available data on the demand for loans is essentially non-existent. Even if we were to speculate, based on the available data, that the number of loans issued in a given geography is down, how can we say whether this is due to banks not issuing loans versus businesses not applying for them?

From a community development standpoint, answering this question is especially important when we consider the vital role small businesses play in lower-income communities; compared to large corporations, they employ a higher percentage of people on public assistance and those with lower education levels. Small businesses also help to promote local economic development and revitalize neighborhoods by operating in areas where large corporations may choose not to.

Despite these local limitations, on a national level, the data is more reliable. We know that there was a significant decline in the total volume of bank loans of less of than $1 million during the Great Recession. These loans, which can serve as a proxy for small business lending, are reflected in the graph below.

U.S. Total Volume of Small Business Loans (Millions)1

U.S. Total Volume of Small Business Loans (Millions)

Federal Deposit Insurance Corporation, 2005-2014

This decline in small dollar loans was due, in large part, to a tightening of lending standards among banks and lower demand among small businesses . While conditions among small businesses have improved recently and loan standards are easing, lending levels remain considerably below their prerecession heights. These factors have led to the passage of a number of new pieces of legislation, like the Small Business Jobs Act, designed to get small businesses back on track.

Nevertheless, because all economies are different, national programs are only so effective on a regional level. To formulate locally-based solutions that support small business development, we need more data and we need better data. Banks, non-profits, and government agencies often collect data on small businesses lending independently, but by sharing our information, we can maximize our impact. The recently released What Counts: Harnessing Data for America’s Communities proffers many innovative strategies to bring different players to the table as we strive to democratize data and work collaboratively to make informed decisions. Ultimately, many of the pieces required to gain a better understanding of small business credit needs may already exist; we just have to figure out how to best put them together.


1. All data shown are from June 30 of the respective year and reflect commercial and industrial and nonfarm nonresidential loans of less than $1 million.

The views expressed are not necessarily those of the Federal Reserve Bank of San Francisco or of the Federal Reserve System.

Would you like to be notified as new publications and resources become available? Want to stay in the loop on upcoming conferences and events? Join our mailing list.