Last month, the MEJ introduced you to a compendium of research on small business finance released by the SBA Office of Advocacy and entitled, appropriately enough, Small Business in Focus: Finance. The first report was, you may recall, a general overview of the small business lending market according to loan amounts and lending institutions. That report was followed by a closer look at lenders’ market share, particularly commercial banks versus finance companies, which is the subject of An Examination of Finance Patterns Using the Survey of Small Business Finances. This study reviews data from the ten year period 1993 through 2003 to analyze how small business financing appears to have changed over the period and, specifically, whether small firms were using the same types of financial products and institutions at both ends of the time frame.

The short answer is that they are — sort of but not quite. Certainly, the use of credit by small businesses has increased significantly over the period. In 1993, 79.1% of small firms used some form of financing but, by 2003, that figure had risen to 89.0%. The decade also saw a substantial increase in the number of nontraditional loans (particularly credit card loans), in the use of finance companies and other nondepository institutions. It is interesting to note that borrowers with problem credit deserted commercial banks in favor of finance companies by a noticeable margin. At the same time, while the share of microbusiness employers using commercial banks remained virtually unchanged over the study period, nonemployers fled commercial banks for finance companies as well. So, are nonemployer firms more likely to use finance companies because they cannot get a loan from a commercial bank? Or do they prefer finance companies because of other services they offer? Further research is needed to find those much-needed answers.