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Small-Business Financing after the Financial Crisis: Lessons from the Literature

Dodd-Frank was intended to stabilize the banking industry after the crisis, but new regulations arising from it may be unintentionally limiting small businesses’ access to credit. Recent studies on this topic point to at least three ways in which these regulations impact small-business financing:

  • There are higher compliance costs at banks. Increased scrutiny, mandatory changes to banks’ capital structure, and regulatory uncertainty have made small-business lending less profitable relative to other types of lending.
  • There is a disproportionate impact on small banks. While small banks were supposed to be shielded from the higher costs of new financial regulations, surveys of small-business executives show they are still spending more on compliance. This is a concern because banks with under $10 billion in assets issue about half of all small-business loans in the United States.
  • There are increased costs of credit. There is evidence that new regulatory burdens are increasing the costs of credit for the small-business owners who do obtain it, particularly the costs of the consumer financial products that many small firms rely on like personal loans and credit cards.

As a result, a new FinTech industry is emerging, composed of entrepreneurs who are facilitating financing through new digital intermediaries. Start-ups offering so-called marketplace lending, peer-to-peer lending, and crowdfunding are increasingly courting small-business owners as banks retreat from this market. But pending regulation of this new industry will dictate how much of a role it will play in small-business financing in the future.

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