It’s time to shine a light on small business lending

Motherhood. Apple Pie. Homeownership. Small Businesses. While all are fundamental parts of American identity, one is not like the other. The federal government gathers and reports detailed data about the first three (yes, even the apple harvest). But there is no comprehensive data about small businesses’ access to fair and affordable credit—even though small businesses are keys to job creation and economic growth. 

Literally no one knows how much small business lending is happening, or what it costs those businesses, or how many businesses are being shut out of needed credit. Although the Federal Reserve undertakes a valuable annual survey of small business credit, this can’t provide the comprehensive data needed to answer these questions.

Hopefully that’s about to change. 

The Consumer Financial Protection Bureau has released a regulation to begin collecting and publishing data from lenders across the small business financing market. The biggest banks and lenders will start collecting data next fall and reporting it in 2025, with smaller lenders having more time to comply. Can accurate and thorough data on small business lending increase the availability and quality of small business credit? Yes.

Look no further than the recent Paycheck Protection Program. The PPP was intended to make emergency loans available to a broad swath of small businesses. But because the program collected and reported data on who received the loans, it quickly became apparent that the only businesses getting PPP loans were the wealthiest and best-connected ones. That data led to a course correction that extended PPP availability to many more of the small businesses who needed it most. The new data on small business lending outside of PPP may help identify and correct similar gaps in the broader small business credit markets. 

While the pandemic is over, now is a particularly important time to pay attention to whether small business credit markets are working well. Millions of businesses struggled to survive the pandemic, and many are still working to get back on their feet. Some supply chains remain unstable, and interest rates have shot up as the Fed tries to tame inflation. While the pandemic years  saw massive increases in the number of new businesses created each month, new and smaller businesses like these are fragile and have always struggled most to access affordable credit.   

Bringing sunshine to the small business credit markets will be a boon to small businesses. Markets work better and buyers benefit when there is more information. In this case, more data on small business lending can lead to improvements in financing cost and transparency, aiding small business owners who have a million other things to do without worrying about whether they are getting a fair deal from lenders. 

The small business owners who will likely benefit most are those that have the hardest time getting affordable credit. This includes millions of businesses in rural areas that have seen a steady retreat of banks and other lenders. The new data will help show how rural businesses are coping with the declining number of community banks, and help other lenders identify where these businesses have credit needs going unmet. 

Minority-owned businesses are another group where the data will shed light on what is and isn’t working. A 2022 study by the Federal Reserve found that firms owned by people of color were less likely than white-owned firms to be approved for financing by a wide range of lenders, with disparities particularly stark among certain types of financing institutions.

Lenders, despite the vocal complaints of a few, will also ultimately benefit. Comprehensive national data will also be a resource for lenders (including potentially new lending startups) who will be able to use the information to identify opportunities, innovate and compete. 

The new data will reveal which business models and financing products are truly effective (and which are not) at delivering affordable small business credit to underserved parts of the market. 

Lenders who aren’t afraid to compete will take up the products and practices that the data reveal are effective in order to build market share. Indeed, the regulation garnered support from some small business lenders who see how the new data has the potential to prove that their business model is effective at reaching small businesses that other lenders may not. Helping the market function more effectively by creating transparency is a market-based, pro-competition alternative to mandates or subsidies.

The regulation will impose some compliance costs. But realistically, the costs of reporting this data are relatively trivial given the technology infrastructure that many lenders today have. The greatest cost worrying lenders that have resisted this regulation may be the cost of embarrassment and fines — if the data reveals a history of little lending to minority communities or of discriminatory credit practices.

Small businesses are vital to American communities and to the economy as a whole. They have more than enough barriers to success right now. A new regulation that helps level the playing field between small businesses and lenders, that boosts fair competition and innovation in the small business credit market, and that enables policymakers and regulators to hold lenders accountable in treating small businesses fairly—that’s a huge win for small businesses and for America. The next big win would be to require all small business lenders to transparently disclose the cost of their loans.

Joyce Klein is the senior director of the Aspen Institute’s Business Ownership Initiative, which works to expand the role of business ownership in generating economic opportunity.