Cleveland Fed Study Shows a Tight Credit Market for Small Businesses

Jan 14, 2018

Cover of the report on microbusinesses from the Federal Reserve Bank of Cleveland
Credit THE FEDERAL RESERVE BANK OF CLEVELAND / THE FEDERAL RESERVE BANK OF CLEVELAND

New business startup rates in Ohio and across the U.S. remain low despite a growing economy. The latest study from the Federal Reserve Bank of Cleveland offers one explanation for the trend. 

The Cleveland Fed study shows that, all things being equal, small businesses are less likely to receive financing. One reason is that lenders want the higher returns they get from lending to larger businesses, according to Cleveland Fed senior policy analyst Ann Marie Wiersch.

“We also know from these other sources that banks may find this type of lending – this really small-dollar lending – tends to be less profitable," says Wiersch.

Wiersch says the funding gap holds even for businesses that are similar credit risks.

"If we look at firms’ credit risk and group small businesses by their credit scores, we find that even among firms with similar credit scores, the larger the business, the more likely it is that they’ll receive funding. So, larger businesses with good credit scores are more likely to receive funding than micro-businesses with good credit scores."

The tight credit market means micro-businesses, those with fewer than five employees, often turn to less appealing options like online lenders. Wiersch says they’re also likely to dip into the personal funds of the company’s owner when facing financial challenges.