The Small Business Credit Gap: Some New Evidence

What is the magnitude of credit constraint or credit gap affecting small businesses? This paper provides estimates of credit gap, defined as the difference between the desired and actual levels of debt for credit- constrained small businesses using the data from the National Survey of Small Business Finances. The estimated credit gap is approximately 20 percent – credit constrained small business on the average would desire 20 percent more debt. This credit gap varies considerably across industries, with service, manufacturing, and wholesale industries facing a significantly larger gap than firms in other industries. Evidence also indicates that relationship banking helps to narrow the credit gap. From a policy perspective, our results indicate that credit policies will be more effective if they are customized to industry needs.