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The Drop in Lending by Finance Companies

Many people have discussed the evaporation of bank credit during the financial crisis and the Great Recession. But few have pointed out how non-bank credit shrank substantially during the same period.

Loans from finance companies are an important source of credit for many small businesses. Next to banks, they provide more credit to small businesses than any other source, the SBA Office of Advocacy explains [1].

Recently released data tables [2] from the Small Business Administration’s annual publication, Small Business Economy, shows the severity of the recent decline in small business loans from finance companies. In the figure below, I present the SBA estimates of the amount of outstanding receivables on business loans from finance companies adjusted for inflation from 1980 to 2010.

Source: Created from data from Small Business Economy 2011

The figure indicates the clear drop off (and lack of recovery) in finance company loans. Between the end of 2007 and the end of 2010, the real dollar amount of outstanding business loans from finance companies fell 28 percent, back to levels not seen since 1998.

This decline has contributed to the difficulty that many small business owners have in obtaining access to credit today. As the SBA’s Office of Advocacy said last fall in “Frequently Asked Questions About Small Business Finance [1]:”

“The recent decline in finance company lending … is a major contributor to the tight condition of today’s small business lending market.”