Walk along Main Street anywhere in the U.S. and chances are, you’ll get an earful of complaints about how slowly the economy has recovered from the last recession.

The good news is that it may be starting to pick up steam.

Michael Jones
Michael Jones

The reason: Small businesses, which continue to add more new jobs than larger ones, are slowly getting more access to the credit they need to expand.

It’s a trend fueled partly by the rise of fintech lenders use data algorithms to handle applications within a few days, far more rapidly than most banks. While the market was still relatively small in 2014, totaling about $10 billion, it had doubled in each previous year, according to “The State of Small Business Lending: Credit Access during the Recovery and How Technology May Change the Game”,a working paper by Karen Mills and Brayden McCarthy for the Harvard Business School.

“The technology used by these alternative players is fundamentally changing many of the ways in which small businesses access capital, creating efficiencies, greater competition, price transparency, and even making small business lending more profitable,” the study found.

“There is evidence that small businesses are increasingly turning online when searching for loan capital,” Mills and McCarthy added. “Google searches of ‘term loan’ are running about 45 percent above ’06 levels, and have grown every year during the crisis.”

In 2015 alone, small business loans at the largest online lenders grew 58 percent from the year before, according to a report from the U.S. Treasury Department. That compares with 5.3 percent growth in the longer-established bank loan market, the highest rate in five years, according to Federal Deposit Insurance Corp. figures.

Smaller firms are increasingly turning to fintech lenders because of both “the longer application, underwriting and processing time associated with traditional loans” and the greater likelihood, in some cases, of credit approval, Treasury said in a May report.

Since small firms typically put the money they borrow into working capital and expansion needs, greater access to business loans provides an important boost for the U.S. economy.

“Small businesses make up a large and vitally important segment of the U.S. economy,” Federal Reserve Governor Lael Brainard said in a speech he gave last fall, “and their vitality hinges centrally on their access to credit.”

Still, growth for small business loans remains much slower than lending gains for businesses overall, which nearly tripled to $809.9 billion in the four years through 2015, according to Federal Reserve data.

Small businesses typically have a tougher time getting credit after an economic shock, since they have fewer assets to pledge as collateral and lenders tend to be more than usually risk averse in such periods.

When they’re successful, however, and use credit to expand, it’s good for both jobs and gross-domestic product growth, two measures the U.S. relies on to gauge economic expansion and stability.

Businesses with fewer than 500 employees accounted for 60% of hiring in the first three quarters of 2014, the most recent data available, according to the U.S. Small Business Administration’s advocacy office. That was a net total of 1.4 million hires.

From the opposite perspective, those figures also shed light on at least one of the reasons for lackluster growth in recent years.

Small businesses’ share of total net job losses from 2007, the year before a housing market slump culminated in the financial crisis, through 2012 was about 60 percent, according to the report by Mills and McCarthy.

From the pre-recession employment peak to its nadir in March 2009, jobs at small firms fell about 11 percent, they wrote. Payrolls at larger businesses shrank just 7 percent.

The disparity was even starker among the smallest of small businesses, Mills and McCarthy wrote: Jobs declined 14.1 percent in establishments with fewer than 50 employees, compared with 9.5 percent in businesses with 50 to 500 employees.

While those businesses have now returned to creating two of every three jobs in the U.S. – a level first achieved in 1995 – their slow rebound raised questions about the U.S. loan market.

“In the current lending environment, where you sit often determines where you stand on the question of, is there a gap in access to bank credit for small businesses?” Mills and McCarthy wrote. “Most banks say they are lending to small businesses, but major surveys of small business owners point to constrained credit markets.”

Bio: Michael Jones is the Director of Content and Community Development at Bond Street, a company focused on making small business loans simple, transparent, and fair.

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