Small Business Access to Credit: Yesterday, Today and Tomorrow

Small business access to credit has been turned upside down in the United States over the last 30 years. It has moved from a difficult problem for small business owners and managers as a group to a relatively modest one. The transformation is largely due to financial services deregulation, information technology, and finance innovation. Prominent among the latter is credit scoring. These developments raise policy issues that are relevant to all developed countries. Among them are: how does one measure and monitor small business credit access? What reassessments need to be made now that credit scoring has mitigated the market failure argument supporting government subsidized small business finance programs? What are the dimensions of a small business credit market? How will recent financial innovation withstand a severe recession? Within the bounds of safety and soundness, what can/should be done to promote de novo bank entry? And, what is the future of conventional small business loan-backed securitization in the light of the sub-prime debacle? Global forces have transformed the financial systems of all developed countries. , Yet, when considering those changes and their implications for small business access to credit, all countries start from a different point. The author’s comments focus on the changes American small business experienced accessing credit over the last 30 years, not because the U.S. experience is more instructive than any other nor because the American financial system is somehow more advanced, but simply because he knows it better and can use its context to develop implications for small business that appear applicable to most, if not all, of the world’s developed countries. The paper is organized as follows: the first section briefly addresses small business use and sources of debt finance. The second discusses small business owner access to credit and change in it. The third identifies three major factors that drove credit access’s decline as a major small business problem. The fourth recognizes characteristics of the American banking system that differ from other banking systems in developed countries, and how that may affect small business access to debt capital. The fifth presents six implications for small business and policymakers in the developed world and the paper concludes with brief comments.