Small Business Lending: Challenges and Opportunities for Community Banks

This paper adds to that discussion in three key ways. First, the authors’ research builds on existing evidence that suggests that the decline in SBL by community banks is a trend that began at least a decade before the financial crisis. Larger banks and nonbank institutions have been playing an increasing role in SBL. Second, the authors’ work shows that in the years preceding the crisis, small businesses increasingly turned to mortgage credit — most notably, commercial mortgage credit — to fund their operations, exposing them to the property crisis that underpinned the Great Recession. Finally, the authors’ work illustrates how community banks face an increasingly dynamic competitive landscape, including the entrance of deep-pocketed alternative nonbank lenders that are using technology to find borrowers and 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.