The State of Small Business Lending: Innovation and Technology and the Implications for Regulation

142 Pages Posted: 1 Dec 2016

Date Written: November 29, 2016


Small businesses were among the hardest hit in the Great Recession, accounting for more than 60 percent of the total jobs lost. The economic crisis was one focused on the banking sector, which is one reason for the disproportionately high impact on America’s small businesses, which tend to be heavily credit dependent. While some aspects of the economy have recovered in the years since, small businesses have struggled, primarily due to a lingering credit gap that is the result of banks being less likely to make the smaller dollar loans – those less than $250,000 – that small firms (more than 70 percent) seek. A rapidly-growing financial technology (fintech) sector has quickly stepped in to fill this gap, and incumbent banks are exploring a variety of partnership strategies with the new entrants. Yet, while the much needed increase in sources for financing has been welcome by small businesses, these innovative fintech lenders have sparked concerns around transparency and the high costs charged to borrowers. These concerns are exacerbated by a “spaghetti soup” of regulators, where no one federal entity has oversight, and protections around small business borrowing slip through the cracks. This paper takes a detailed look at the current state of small business lending, the causes for the persistent low-dollar loan gap, the solutions being driven by innovative fintech lenders, and the key concerns around oversight and regulation. Finally, our objective is to provide regulatory recommendations that will protect small business borrowers, while not dampening the innovation that has proven so promising for filling the gap in small business access to credit.

Suggested Citation

Mills, Karen and McCarthy, Brayden, The State of Small Business Lending: Innovation and Technology and the Implications for Regulation (November 29, 2016). Harvard Business School Entrepreneurial Management Working Paper No. 17-042, Harvard Business School General Management Unit Working Paper No. 17-042, Available at SSRN: or

Karen Mills (Contact Author)

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Brayden McCarthy

Fundera Inc. ( email )

123 William Street, 21st Floor
New York, NY 10038
United States

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