Somewhere in America today, a business owner is trying to get a loan. She has been spending the past two months going to large, too-big-to-fail banks, regional banks both large and small, community banks, and now, private lenders, each with their own excuses on why they cannot fund her loan.

She finds herself asking a series of questions around the denials she has been getting:

• What does it mean when a bank says they like my deal but do not have an “appetite” for my industry?
• What does it mean when a bank says they like my deal but do not have an “appetite” for the loan type I am seeking?
• Why can’t the bank offer me a longer term on my loan? Sure, I would pay more interest, but my actual payment would be lower, which helps with cash flow. And wouldn’t the bank like more interest?
• Why can’t the bank lower my payment by offering me a longer amortization? They say my cash flow is not sufficient to cover the debt service, but can’t they lower my payment by offering me a longer amortization? Then my cash flow would be sufficient to cover the lower payment.
• Why do banks have to charge the interest rate they are quoting? They say I am risky, but wouldn’t I be less risky if they lowered the rate instead of increasing the rate to lower my payment?
• My banker at my community bank has known me for ten years. He knows how I operate and what people think of my company. Does my reputation and relationship not mean anything to his bank? He says he is vouching for me, but his bank just cannot see past the numbers and thinks we are too risky for their size.
• Now that all of the banks have said no, where do I go next? I have searched for non-bank lenders, but there seems to be thousands of them. One of them even gave me a term sheet, but it was for less than I needed, was very expensive, and it had covenants I have to keep that I know I cannot meet as I invest in growth. Plus, I have no idea who these people are, and they do not know anything about me. Can I trust them?

Our hero is not alone in her struggle. In the Federal Reserve’s 2025 Small Business Credit Survey, only 42% of responding firms that applied for financing said that they received the full amount they sought, and 22% received nothing at all.¹ In the 2019 Survey, before the pandemic, 51% received the full amount (see trends in Figure 1).² The share has not recovered since, falling as low as 31% during the pandemic and only recovering up to the low 40s. Part of that gap coincides with the interest rate cycle, with 2019 being a low rate year, but the odds of a small business getting all the money it asked for remains well below where they were. Some owners do not apply at all because they expected to be turned down. The Fed calls these owners “discouraged” borrowers. Some business owners are not even pursuing capital, even if there are potential options out there for them.³

Figure 1

Full Receipt of Capital Sought Since 2018

Share of applicants that received all the financing they sought, by survey year, percent. Gold marks 2019, before the pandemic, and 2025, the latest survey.

Our hero is struggling, but at least she is looking, and she is looking in the right places. As seen in Figure 2 below, of every lender type the Fed tracks, small banks fully approve the highest share of applicants at 57%, versus 43% at large banks and only 38% at online lenders, which not only have lower approval rates (i.e. approving loans), they also got lower approval rates (i.e. satisfaction with their services) from survey respondents because of their high interest rate levels and unfavorable repayment terms.⁴ The FDIC’s survey of bank small-business lending confirms that lending from small banks has historically been a relationship business, conducted face to face, underwritten substantially on knowledge of the borrower.⁵ The institution best equipped to say yes to our hero, in 2026 as in 1926, is a small, local bank that knows her.

The problem is we have spent the last forty years watching those banks disappear.

Figure 2

Who Actually Approves Small Business Loans

Share of small-business credit applicants fully approved, by lender type, percent. Gold marks small banks, the lender most likely to say yes.

In 1984 the United States had 17,901 federally insured banks and thrifts; as of March 31, 2026, that number has dropped by about three-quarters to 4,278.⁶ The 15,663 community banks from 1984 made up 87.5% of those institutions in 1984 and held 38% of the industry’s assets. Now, the 3,852 community banks still make up a similar percentage of those institutions at 90%, but their share of assets has fallen to 10.6% in Q1 of 2026.⁷

Even so, these community banks punch far above their weight. In the FDIC’s most recent community banking study, using year-end 2019 data, community banks held 36% of the banking industry’s small business loans and 70% of its agricultural loans, even though they held just 12% of the full banking industry’s assets at that time.⁸

Lending has moved, but the shift has not solely been to larger banks. Over the last two decades, private credit has come in to fill the gap the banks have left for reasons I will outline in this paper. The private credit market has skyrocketed from $310 billion in 2010 to about $1.4 trillion in the United States today.⁹ But that private capital comes at a cost. The Fed’s own Vice Chair for Supervision, Michelle W. Bowman, noted in a recent speech that business development companies, one of the main non-bank lenders to fill the gap, make most of their loans at spreads of 400 basis points or more, while large banks make most of theirs at 200 or less.¹⁰

In her search for capital, though, our hero has discovered that this private credit market has no directory, no shared standards, and no way for a lender who has never heard of her or her company to price her fairly, which are all part of a fragmentation problem I will discuss in Part IV.

Why has it become so hard to find a loan in America?

The answer is that we built this system one decision at a time over 150 years of banking history. Boom and bust cycles created financial crisis after financial crisis necessitating new rules to protect depositor capital. I will not try to argue in this paper that the rules were unwarranted – in most cases, the rules (or at least some of the rules) were likely needed for depositor protections. In some of those cases the diagnosis was spot on, but the prescription turned out to cause more issues than the initial problem. It’s like those medical ads with the fine print: “side effects include creation of perverse incentives, bubble inflation and high potential of bank failure; see an examiner if you experience a capital ratio below 8%.” The biggest impact was on whatever group of borrowers were cut out of the banking system when a new regulation came through, creating a cycle that repeats throughout history:

Every financial crisis produced rules. Every set of rules narrowed what a bank was permitted to fund. And every narrowing pushed another category of American enterprises out of the banking system. New, more expensive lenders came to fill the gaps with less flexible terms and higher costs of capital.

This paper will walk through 150 years of banking history in the United States to find out why banking has changed so much in America since the late 18th century. We will learn about booms and busts, crashes and crises, rules and regulations and then repeals of regulations, and everything in between.

These past changes and their effects are well discussed, analyzed and documented, so I plan to summarize them as briefly as possible. But from there, I will address what many writers and speakers have failed to address, which is where we are heading today and what the future holds for borrowers under today’s lending ecosystem and its rules:

What happens to small businesses, to economic mobility, American dynamism and the American dream if the trajectory of the last 150 years simply continues? What consequences lay ahead if the status quo remains for companies seeking financing in 2026?

That is the subject of this paper – to look into the present and the future to see what America looks like without a healthy lending environment.

Our paper begins where the trouble began: a banking system that once funded everything.