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The Rise of Finance Companies and FinTech Lenders in Small Business Lending

Journal: Review of Financial Studies

Date: 20221101

Author: Gopal, Manasa; Schnabl, Philipp

Abstract:
We document that finance companies and FinTech lenders increased lending to small businesses after the 2008 financial crisis. We show that most of the increase substituted for a reduction in bank lending. In counties in which banks had a larger market share before the crisis, finance companies and FinTech lenders increased their lending more. We find no effect of reduced bank lending on employment, wages, and new business creation by 2016. Our results suggest that finance companies and FinTech lenders are major suppliers of credit to small businesses and played an important role in the recovery from the 2008 financial crisis.

Link: Google Scholar

Background and Context

Research Goal

This study examines how nonbank lenders filled the gap in small business lending after banks reduced lending following the 2008 financial crisis.

Data Source

Analysis uses comprehensive loan-level data covering secured, non-real-estate U.S. business loans from 2006-2016, representing 73% of total small business lending.

Methodology

Researchers analyzed lending patterns across U.S. counties with varying levels of pre-crisis bank market share to identify substitution between bank and nonbank lending.

Shift from Bank to Nonbank Lending (2006-2016)

  • Bank lending declined by 26% between 2007-2010 and never fully recovered to pre-crisis levels
  • Nonbank lending grew by 40% from 2006 to 2016
  • By 2016, nonbank lenders provided 60% of small business loans

Growth in Different Types of Nonbank Lenders

  • FinTech lenders showed explosive growth, from virtually zero in 2006 to significant market presence by 2016
  • Independent finance companies increased lending by 62%
  • Traditional finance companies remained the largest nonbank lenders

Collateral Requirements Convergence (2006 vs 2016)

  • Nonbank lenders significantly increased collateral requirements between 2006-2016
  • Collateral requirements converged toward traditional bank standards
  • Shows evolution of nonbank lending practices to mirror bank lending

Impact on Real Economic Outcomes (2007-2016)

  • No significant negative effects on employment, wages, or business creation
  • Nonbank lending effectively substituted for reduced bank lending
  • Shows resilience of small business credit markets despite bank lending contraction

Average Loan Characteristics by Lender Type (2016)

  • FinTech lenders typically offer smaller loans with shorter maturities
  • Traditional finance companies offer similar loan sizes to banks
  • Shows different lending strategies across lender types

Contribution and Implications

  • First comprehensive study showing nonbanks have become majority lenders to small businesses, with 60% market share by 2016
  • Demonstrates resilience of credit markets through lender substitution during financial crisis
  • Highlights importance of including nonbank lenders in analysis of small business credit markets

Data Sources

  • Lending growth chart based on Table 2 Panel C data on loan origination by lender type
  • Nonbank types growth chart based on Table 2 Panel B data on lender categories
  • Collateral requirements based on Table 2 Panel G data on collateral types
  • Economic outcomes based on Table 9 Panel A data on real effects
  • Loan characteristics based on Table 2 Panel F data on loan characteristics