Successful applicants wait weeks or, in some cases, a month or more for the funds to actually be approved and available. Some banks are even refusing to lend to businesses within particular industries (for example, restaurants) or below revenue thresholds of $2 million. Small business loans, often defined as business loans below $1 million, are considerably less profitable than large business loans.

Small business lending is riskier than large business lending. Small businesses are much more sensitive to swings in the economy, have higher failure rates, and have fewer assets to collateralize the loan.

Assessing creditworthiness of small businesses can be difficult due to information asymmetry. Little, if any, public information exists about the performance of most small businesses because they rarely issue publicly trade equity or debt securities. Many small businesses also lack detailed balance sheets, use sparse tax returns and keep inadequate income statements.

Community banks have traditionally placed greater emphasis on relationships with borrowers in their underwriting processes, but these relationships are expensive and have not in the past translated well to automated methods for assessing creditworthiness, which are favored by larger banks.

Costs of underwriting small business lending are also high due to heterogeneity of small businesses and lack of a secondary market. Heterogeneity of small firms, together with widely varying uses of borrowed funds, have impeded development of general standards for assessing applicants for small business loans and have increased costs of evaluating such loans. Moreover, the heterogeneity of small business loans has made it difficult to securitize and sell pools of small business loans in the secondary market.

Transaction costs to process a $100,000 loan are comparable to a $1 million loan, but with less profit. As a result, banks are less likely to engage in lending at the smallest dollar level.

Some banks, particularly larger banks, have significantly reduced or eliminated loans below a certain threshold, typically $100,000 or $250,000, or simply will not lend to small businesses with revenue of less than $2 million, as a way to limit time‐consuming applications from small businesses. This is problematic as over half of small businesses surveyed are seeking loans of under $100,000, leaving a critical gap in the small business loan market. Often times, the biggest banks refer small businesses below such revenue thresholds or seeking such low dollar loans to their small business credit card products, which earn higher yields.

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