Who lends to small businesses, and how is this changing over time? This paper challenges popular answers to this question. First, despite the growing role of non-banks, banks continue to be the most important source of credit for small businesses. Second, small and large banks continue to play important, distinct roles in providing credit to small businesses. Their relative importance depends on the range of banking products and services that small businesses need. Such financing demand reflects the strength and structure of the local economy, and especially real estate valuations, which help collateralize much of small banks’ business lending. Also, differences in the evolution of bank business models and new financing innovations are reshaping the menu of financial products that lenders of different sizes can offer small businesses.

Maintaining a diversified banking sector populated with lenders of various sizes is important for ensuring the resilience of the US banking system. Heterogeneity and the adaptability of bank business models to structural changes in local credit demand and changes in regulations are bulwarks of US banking. Different trends in small business lending and in the market shares of small banks across states and regions show how the industry has continued to adapt to changing local conditions.

The ongoing recovery in small business lending varies widely from place to place in its strength and timing. The prospects for sustaining the recovery likely depend on the degree to which robust economic fundamentals underpin local real estate valuations that support credit demand. A better understanding of how regional and local economic conditions may differ from national trends, and of how such differences affect local credit needs, would help lenders, businesses, and policy makers prepare for the next downturn.

The remainder of this paper begins by showing how loans, and specifically small business credit, fit into the much broader context of corporate and non-corporate business finance. It then explores how business borrowing has evolved in the sizes of lenders and the different sizes and types of loan products these lenders offer. It then investigates whether a bank’s small business lending behavior changes as the bank grows. Finally, it looks at geographic heterogeneity in small business lending trends. Several appendices provide supporting evidence and explore selected technical issues around the measurement of small business lending.