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Consumer & Community Context: Access to Financial Services Matters to Small Businesses

By the Federal Reserve Board of Governors and the Federal Reserve Banks of Atlanta, Cleveland, and New York

Small businesses are vital to the American economy. Businesses with fewer than 500 employees account for 99.9 percent of all U.S. firms and nearly half of total employment. Small businesses are remarkably diverse, producing products or delivering services in virtually every industry and accounting for about 44 percent of the total private sector output of the economy. Beyond numbers, small businesses are also part of the fabric of their communities, employing local residents and supporting civic causes.

Small business owners and entrepreneurs need access to a variety of credit sources. Short-term credit matters for day-to-day management of cash flow, while longer-term credit is essential for capital investments. Yet, less than half of small businesses report that their credit needs are met.

This issue of Consumer & Community Context focuses on small businesses’ access to capital and is presented through a series of three articles:

Article 1: Searching for Small Business Credit Online: What Prospective Borrowers Encounter on Fintech Lender Websites

This article takes a closer look at online lenders, an increasingly important source of credit for small businesses. In examining the websites of various online lenders, it finds inconsistency in the disclosure of cost information that can pose difficulties for prospective borrowers.

Article 2: Mind the Gap: Minority-Owned Small Businesses' Financing Experiences in 2018

Using data from the Small Business Credit Survey, this article explores the experiences and challenges faced by minority-owned small businesses, focusing in particular on their access to adequate and affordable financing. It finds that black-owned firms are less likely than white-owned firms to be approved for financing at banks, even when taking into account firm characteristics.

Article 3: Growing Pains: Examining Small Business Access to Affordable Credit in Low-income Areas

This article offers a look at credit access among small businesses in low-to-moderate income (LMI) areas, exploring shifts in the pre- and post-crisis credit landscape. It finds that lower-income neighborhoods have experienced larger increases in the number of costlier alternative financial services (AFS) companies compared to wealthier areas. Furthermore, it shows that small business loan volumes in LMI communities, though proportionate to the number of small businesses, remain a fraction of loan volumes seen in higher-income neighborhoods.

For more information, visit Consumer & Community Context.