State of Small

Business Lending: US
and UK
Karen Gordon Mills

Senior Fellow, Harvard Business School & Harvard Kennedy School

Former Administrator of the U.S. Small Business Administration
and Member of President Barack Obamas Cabinet
OOCTOBER 2015

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WHY WORRY ABOUT ACCESS TO CREDIT FOR SMALL BUSINESSES?
US: small firms produce half of private jobs, two-thirds of net
job creation
UK: small firms account for half of private jobs, 65% of net job
creation

US Small Businesses

~5.2 Million

~28 Million

Sole
Proprietors
(~22M)
High
Growth
(~200K)

Employers*
(5.7M)

Supply
Chain
(~1M)

UK Small Businesses

Sole
Proprietors
(~3.3M)

Employers
(~1.9M)

Main Street
(~4M)

Note: Remaining 500,000 business are Non-Supplier Businesses in the Traded Sector
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US: SMALL FIRMS HIT HARDEST IN CRISIS -- 60% OF JOB LOSSES
Quarterly Net Job Change by Firm
Size (000)

93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
Small (<500 Employees)

Medium (500-999 Employees)

Source: Bureau of Labor Statistics, Business Dynamics Statistics (latest as of 4Q14). Chart shows the change in the
number of charges by firm size, specifically small businesses (firms with fewer than 500 employees) and large
businesses (firms with more than 500 employees).
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UK: JOB CREATION AT SMALL FIRMS ALSO HIT HARD DURING CRISIS
Percentage of Small Businesses Reporting Net Change in
Employment, Last 3 Months

Source: Federation of Small Businesses (October 2015)

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WORKED FOR PRESIDENT OBAMA AS HEAD OF SMALL
BUSINESS ADMINISTRATION (2009-2013)

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RECORD SBA LOANS HAVE HELPED, BUT LIMITED MARKET REACH
SBA represents <10% of market, limiting broader market impact

Loan Volume ($ billions)

$35

SBA lending up two-thirds from the crisis, bringing back

1,000 lenders, helped by new legislation and an agency-wide
initiative to cut paperwork

$30

$25

$20

$30.5

$30.3

$30.1

FY11

FY12

FY13

$25.0
$22.0
$18.0

$15

FY08

FY09

FY10

Source: Small Business Administration. 7(a) and 504 loan volume since Fiscal Year 2008. As of May 2014.
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US: CREDIT FROZE DURING CRISIS, SLOW TO RECOVER FOR SMALL FIRMS

Net
Loosening

Net
Tightening

Percentage of Bankers Reporting Net Tightening or Loosening of

Loan Conditions

Tightening Standards (Large Businesses)

Tightening Standards (Small Businesses)

Source: Federal Reserve, Senior Loan Officer Survey as of July 2015.

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US: BANK LOANS TO SMALL BUSINESSES FELL DRAMATICALLY

Loans fell 18% during and after crisis, only recently began
growing again
Small Business Loan Assets on Balance
Sheets ($ Billions)

Source: Federal Deposit Insurance Corporation, Call Report Data. As of January 2015
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UK: BANK LENDING TO SMALL FIRMS FROZE IN CRISIS, YET TO RECOVER

20

Percentage Changes in Small Business Lending

on a Year Earlier

15
10
5
0
-5
-10

British Bankers' Assoc Bank of England Business, Innovation & Skills Dept
Source BIS: Monthly BIS survey and Bank calculations. Lending by four UK lenders to enterprises with annual bank
account debit turnover less than 25 million. Survey ended December 2012.
Source BOE: Lending by UK monetary financial institutions to UK SMEs with annual debit account turnover on the main
business account less than 25 million. Data is through February 2014.
BBA Source: Lending by a BBA panel of lenders to SMEs in Great Britain. SMEs are defined as businesses with turnover
up to 25 million. Data is through December 2013
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US: STRUCTURAL PROBLEMS ALSO PLAGUE LOAN MARKET
Small banks supply about 40% of SME loans, but being
consolidated

1,800

14

1,600

Number of Community
Banks

12

1,400

10
8
6
4

2,000

1,200
14

1,000
800

12
9

600
7

400

200

1985.0
1990.0
1995.0
2000.0
Number of Community Banks

Average Bank Assets ($

billions)

16

Number of Community Banks (Left Axis) vs. Average Bank

Assets (Right Axis)

2005.0
2010.0
Average Bank Assets

Source: Federal Deposit Insurance Corporation, Call Report Data. As of January 2015. * Per reports from the FDIC
Acting Chairman Martin Gruenberg and a December 2012 survey of small business finances conducted by the Federal
Reserve Bank of Atlanta
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UK: LENDING TO SMALL FIRMS REMAINS HIGHLY CONCENTRATED

About 90% of small firm loans are provided by largest banks

in UK
Volume Shares of Small Business Loans in England and Wales,
1999 vs. 2013

Others; 4%
Lloyds; 23%
Santander; 11%
HSBC; 11%

Barclays; 21% RBS; 29%

1999

Others; 7%
Santander; 4%Lloyds; 26%
HSBC; 18%

Barclays; 19% RBS; 26%

2013

Source: 1999 figures from CC, 2013 figures from Charterhouse release Q1 2013. Percentages may not sum to 100
because of rounding.
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FIRMS WANT SMALL LOANS, WHICH ARENT PROFITABLE FOR BANKS

About 70% of small businesses want loans below $250K

% of Small Firms That Apply for Loans
45%
40%
35%
30%
25%
20%

39%

15%
10%
12%

5%

17%

14%

18%

0%
<50K

$50-100K

$100-250K

$250-500K

>$500K

Source: Federal Reserve (New York), Small Business Credit Survey, Fall 2013
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US: THREE INITIAL MODELS DEVELOPED BUT LINES ARE NOW BLURRING

InstitutionalDriven P2P
Marketplaces
Institutional
marketplaces,
sometimes referred to
as peer to peer
lenders, were initially
consumer-focused.
Now, greater emphasis
on small businesses.

Borrower-Driven
Broker
Marketplaces
Connect small business
borrowers to a series of
lenders that are part of
their online
marketplaces; most
work with conventional
lenders like big and
small banks, SBA
lenders as well as
alternative lenders.

Balance Sheet
Lenders
Use balance sheet
capital from
institutional investors
and decisions loans via
proprietary risk scoring
algorithms that rely
largely on cash flow
data.

Source: Authors analysis

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US ONLINE LENDING ECOSYSTEM

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UK: P2P MODEL DOMINATES SMALL BUSINESS LENDING
UK Peer to Peer Lending Market Share Business Focused
Platforms

Funding Circle LendInvest MarketInvoice

Outstanding Loans

Thincats

Landbay

New Loans

Source: Data includes only members of P2PFA Source: P2PFA, Morgan Stanley Research.
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UK: P2P PLATFORMS ALSO SEEN AS GOOD VALUE AND EASY TO USE VS. BANKS, BUT LESS SECURE AND HIGHER RISK

UK Public Perception of P2P Lenders vs. Traditional

Banks

P2P

Banks

Source: UK Alternative Finance Industry Report (Nesta 2014), Morgan Stanley Research
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US AND UK ONLINE LENDING GROWING RAPIDLY
Lending to Small Businesses, 2014 vs. 2020
Estimates, Billions
US Marketplace
UK
50
Marketplace
$47b
n
45

Online
lending
estimated to
be 16% of
issuance by
2020 vs. 3%
today

+47%
annua
l
growt
h

40
35
30
25
20
15
10
5
0

+55%
annual
growth

2014

9b
n

2020E

Source: Company data, Morgan Stanley research estimates.

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US AND UK: ONLINE MARKETPLACE IS EVOLVING RAPIDLY
Sources of
Customers
Bank
Partnerships

Santander / RBS in
UK

Govt mandate in
UK?

Consortiums

BancAlliance in US

Traditional
Banks

Product
Account

Sources of Capital
Govt in UK via

Receivable /

British Business

Invoice Lending

Bank

Term Loans

Retail

Short-term Cash

Instl / Hedge

Advances

Fund
Traditional
Banks

Warehouse Lines

Loan Brokers
Syndication
Small business customer does not always know
what product will best meet their needsMarkets
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WHAT IS THE APPROPRIATE LEVEL OF REGULATION IN US MARKET?

Two views:
NEED FOR REGULATION
No current designated federal
regulator
Should there be one?
CFPB should implement Dodd Frank
1071

Lack of transparency on costs

to small business owners
Concern that this might be the
next subprime market
Emergence of loan brokers

IMPROVE EXISTING REGULATION/

ENCOURAGE MARKET MECHANISMS

Clarify and streamline existing

state and SEC regulatory
oversight
Let nascent market develop
Current industry move to
improve transparency
Borrowers Bill of Rights
Consistent disclosure of cost
metrics

Internal industry oversight

increasing on loan brokers

High costs

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UK APPROACH
Supportive Government
Environment
Providing funds through

Streamlined Regulatory
Environment
Single regulator:

platforms via British

Financial Conduct

Business Bank

Authority vs. overlapping

Tax free allowances for ISA

investments in P2P
platforms
Results of Competition and

regulation in U.S.
Principles-based
oversight

including capital

Markets Authority 2016

requirements

study on small business

lending in UK

Potential support for

Investor protections,

Borrower protections:
clear, fair and not
misleading

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