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What Do Small Businesses Need Banks for, Anyway?

What Do Small Businesses Need Banks for, Anyway?
Photograph by Matthew Staver/Bloomberg

At the end of June 2008, just months before the collapse of Lehman Brothers prompted credit to seize up, there was $327 billion in small business loans outstanding, according to the Federal Deposit Insurance Corp. Five years later, the value of small business loans had fallen 12 percent, to $289 billion. That’s probably a conservative estimate of the toll that the financial crisis took on banks’ willingness to make small loans. Earlier this summer, the Cleveland Fed reported that small-business lending fell 78 percent from the summer of 2007 to the end of 2012, accounting for inflation.

So-called alternative lenders—including Kabbage and On Deck Capital, peer-to-peer lenders, and firms that specialize in merchant cash advances—have picked up some of the slack, usually at pricier rates than traditional bank loans. Because they’re not tracked like banks, the amount of financing they’re responsible for is unclear. For one proxy, Business Financial Services Chief Executive Officer Marc Glazer estimates that the market for the merchant cash advances and term loans that his firm provides is $50 billion today, up from $5 billion before the financial crisis.