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.

Recently released data tables 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:”

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


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

5 Reactions
  1. I agree that finance for small business is difficult. I also think that small business owners must think more creatively when it comes to getting the capital they need. There are many options for finding small business money these days, many of them online. Thanks for the great numbers.

  2. Very interesting. I do quite a bit of my writing for a small business finance company, and their lending volume is up, up, up. That stands out as somewhat of an outlier, according to these numbers.

    Great info as always, Scott.

    • Adam Gottlieb @ The Frugal Entrepreneur

      If the small business financing company you’re working for deals with business cash advances or something similar, then that makes sense. This kind of financing is specifically geared towards those businesses that are dealing with bad credit/poor sales/no collateral,etc, and these are precisely the businesses that banks are avoiding these days.

  3. Before we slit our collective wrists, let’s take a slightly longer view than month to month. And, these stats will vary state to state. For example, SBA-504 financing approved in California for the first quarter 2012 was up 43% compared to first quarter 2011. In Arizona, SBA-504 loan financing more than tripled for the same period. Even in Nevada, arguably hit as hard as any state in the economic downturn, SBA-504 financing jumped 34% first quarter this year. Is your glass half-full or half-empty?