Small Businesses and Their Banks: The Impact of the Great Recession

Abstract

Capital is the lifeblood of small businesses, which rely on credit to start, operate, and grow. Historically, small businesses relied on banks to access capital. But during the Great Recession, credit markets froze, and banks slowed and even stopped lending, even to businesses with good credit. This crisis hit small businesses hard and credit conditions have been slow to recover. The economic downturn significantly devalued collateral—especially home equity—that small business owners use to secure credit. Lenders and business owners became risk averse due to lost sales and the trauma from the crisis. This chapter explores the short-term cyclical factors that made securing credit particularly hard for small businesses during the recovery, setting the scene for the entry of new technologies and lenders.