Small business ownership is widely believed to be a pathway to wealth-building, but there is limited research on the long-term financial implications of credit access and use for entrepreneurs. To understand long-term business and personal credit outcomes for small business owners, we partnered with five community development financial institutions (CDFIs) that are small business and microloan lenders to study behaviors and credit outcomes of businesses and their owners before and after they receive a loan.

Why This Matters

Small businesses need access to credit to finance working capital, invest in equipment and real estate, and facilitate other business activities. Small business loans can benefit entrepreneurs’ wealth and have been positively correlated with small business starts and economic growth. However, small businesses can struggle to access capital; this is particularly salient for firms with limited collateral, with highly variable revenue, and in riskier sectors. These types of firms are some of the key beneficiaries of lending by community development financial institutions (CDFIs). The public, private, and philanthropic sectors make investments of significant size and number in efforts to support small businesses via CDFIs, yet investors, policymakers, philanthropists, and researchers have limited insights into firm trajectories, capital needs, and the effectiveness of business development and capital access supports.

What We Found

Our findings reveal several insights into the behavior and credit outcomes both for businesses and their owners:

• For microloan and small business borrowers, consumer credit scores of the business owners improve in the years after origination, particularly for borrowers with the lowest initial scores.
• For microloan and small business borrowers, consumer debt levels rise after receiving a CDFI loan (which may suggest their business credit needs are not fully met by the CDFI loan).
• The share of microloan and small business borrowers with a business credit score increases significantly in the years after origination.
• The share of microloan and small business borrowers with a 90-day delinquency on any business debt increases after receiving a CDFI loan. This may be related to the fact that overall business borrowings also increase.

Overall, these findings reveal several takeaways for lenders and policymakers to act upon:

1. Targeting: The findings imply that CDFIs are generally able to identify borrowers who can benefit from their financing, but it is worth considering how CDFIs can better target businesses and owners that are both most likely to succeed and most in need of assistance.
2. Supports: Further research is needed to explore the link between long-term consumer and business credit outcomes and the type and level of CDFI-provided training and advice.
3. Loan sizes and consumer credit needs: Consumer credit increased in the period after the CDFI loan for both microloan and small business borrowers. This may imply that owners need larger CDFI loans—and if they can’t access them, they will use consumer credit.
4. Progressing in business finance: A significant share of CDFI borrowers are able to establish business credit records and scores, but not all. And only some borrowers are able to access other business loans.

How We Did It

We partnered with five CDFIs that are small business and microloan lenders to assemble a longitudinal dataset tracking 22,433 businesses before and after they received a loan. The businesses we studied received a CDFI loan between 2012 and 2018, and we tracked them through 2022. The data includes 11 years of snapshot credit data purchased from a major national firm, which we joined with data provided by the CDFIs about the businesses, their owners, and loan characteristics.

We looked at credit scores, borrowing, and delinquencies for both the businesses and owners, using consumer (business owner) and business credit data. On the consumer side, we observed summarized trades for a range of credit types, including bank and retail credit cards, mortgages, home equity lines of credit, installment loans, auto loans, and student loans. On the business side, we observed the number and volume of business credit accounts for different time periods. We separated our analysis by small-business and microloan borrowers, which differ in several key aspects such as credit-score profile and home ownership.