As industry analysts, political leaders from both sides of the aisle, and researchers at Brookings and other organizations have shown, America is in the early stages of a large-scale industrial transformation. Hundreds of billions of dollars of public and private investment are rebooting our manufacturing, infrastructure, and energy sectors and stimulating growth in emerging industries. If we take the right steps, this transformation could generate broad-based opportunity—not only for large companies, but also for the small and midsized firms that employ most U.S. workers, build wealth for their owners, and drive innovation.
While much recent attention has focused on the question of how the federal portion of these massive funding flows will change under the Trump administration and a new Congress, the fact remains that small and midsized businesses account for 50% of U.S. industrial production and 75% of the workforce in supply chain industries. With sweeping changes underway—including the deployment of artificial intelligence, the “silver tsunami” of retiring business owners, and new tariffs and proposed tax reforms—the small and midsized business landscape will be reshaped. But will it expand opportunity on a broad basis? What needs to remain constant is applying the right toolkit—from both the public and private sectors—to help small and midsized businesses innovate and fuel economic growth and good jobs, regardless of how these macro forces unfold.
For small and midsized businesses to remain resilient and drive the economy, one of the most important tools in the toolkit has long been financial capital. We now need a spectrum of capital providers—from leading agencies such as the U.S. Small Business Administration (SBA) to traditional and alternative private financial institutions—to innovate on capital solutions for small and midsized businesses.
Most importantly, the type of financial capital that these institutions provide will matter more than ever in the face of a changing environment, and lines of credit offer outsize promise—if we can make them more available, flexible, and scalable.
The state of capital access for small and midsized businesses
Even though decades of debate, programs, and products have addressed gaps, financial capital is still not consistently available and accessible to the full range of viable small and midsized businesses.
JPMorgan Chase and Next Street’s recently published report, The Middle Matters: Exploring the Diverse Middle Market Business Landscape, shows that midsized businesses across the U.S. (firms with $10 million to $500 million in annual revenues) face a shrinking pool of available bank financing due to a wave of consolidations, regulation-driven strategy changes, tightening credit standards, and the end of low-cost capital due to tighter monetary policy intended to reduce inflation.
Unfortunately, for small businesses, an unfavorable credit outlook persists. As a January 2025 Treasury Department analysis found, “Bank lending to small businesses has been declining for several years. Though non-bank lenders have made up part of the difference, business owners report a perception that financing is difficult to obtain. Nearly 40% of potential business loan applicants do not apply for financing.” With the tightening of credit standards, owners of viable small businesses do not always get approved for the types of debt financing they seek; their ability to access the capital is limited. Treasury reported that over 20% of loan applications are rejected, while 28% receive partial funding.
But these patterns suggest an overlooked opportunity. One of the most flexible capital solutions in the marketplace is a business line of credit. While there are other flexible options for businesses, such as revenue-based financing or supply-chain financing, a line of credit can be even more useful, because it can help maintain stability in a company’s cash flows during times of uncertainty as well as growth.
What’s special about the line of credit—and why business owners want it so badly
Like a personal line of credit with a credit card company, a line of credit allows a business to borrow funds up to an agreed-upon amount. The line of credit structure provides businesses with a 24/7 lifeline and offers numerous advantages compared to a traditional term business loan. For example, a business only pays back (and pays interest on) the amount used under the line of credit instead of the entire loan amount, as is the case for a traditional term loan. This special feature, known as a “drawdown facility,” is very attractive to business owners.
In the most recent Federal Reserve Small Business Credit Survey of employer firms (those with at least one paid employee), small businesses have applied for business lines of credit at a higher rate than all other forms of financing, including business loans, over the last 12 months. Of the share of firms that regularly use financing (87%), 34% use the line of credit on a regular basis, trailing only behind credit card usage (56%) and loan usage (53%).
By any measure, the line of credit product is a very popular debt instrument. The top two reasons that owners apply for loans are: 1) to meet operating expenses; and 2) to grow by expanding their current operations, pursuing a new opportunity (e.g., developing a new product), or acquiring business assets. It is unsurprising, then, that the line of credit financing option—which meets both needs—is so attractive.
The solutions we need
We need better line of credit solutions, especially when it comes to the underwriting of loan risk, targeting industries and the needs of supplier businesses (as distinct from firms that focus on retail customers), and tailoring solutions (to the needs of each business owner) in ways that are highly scalable. While these solutions are crucial for expanding access while prudently managing risk, there are structural barriers that might impede these solutions.
First, there’s the threshold issue of how lenders conventionally underwrite lines of credit. Small business owners want solutions that do not require a personal guarantee—a contract that makes a business owner personally responsible for paying back the debt if the business fails to repay. Personal guarantees are often a core requirement for line of credit financing, especially for smaller businesses. Lines of credit from traditional financial institutions and alternate lenders often require a personal guarantee to minimize the potential risk of default on the line of credit. Detecting and mitigating default or nonpayment risk obviously matters; it’s foundational to the financial system. But too many institutions approach this in dated and costly ways—mainly out of habit, not always as a matter of business necessity.
Shifting this approach to risk assessment and management could ultimately come thanks to federal credit programs such as those offered by the SBA. The agency partners with financial institutions, especially commercial lenders, to underwrite and provide a large volume of small business financing. The federal government shares the risk in the form of a credit guarantee, and the commercial lenders offer a large network for originating and managing loans. Currently, the SBA does not offer a line of credit program, instead offering only three guaranteed loan programs: 7(a), 504, and microloans, each with distinct terms and target uses. Congress would need to pass legislation authorizing the SBA to offer a new line of credit product. While that seems unrealistic in the short term, it must be on the radar over the long term. We also need legislation similar to the bill introduced in the last Congress by Rep. Nydia Velázquez (D-N.Y.), ranking member of the House Small Business Committee, that would prohibit the SBA from requiring businesses organized as cooperatives to provide a personal guarantees for an SBA 7(a) loan. Imagine, similarly, if cooperatives could secure an SBA-guaranteed line of credit without a personal guarantee.
Second, more institutions should offer lines of credit that are specific to an industry and tailored to its features. While some alternative financing institutions such as Lendistry and TruFund offer construction-based loans, for example, we need a wider range of industry-specific financing solutions to offer greater flexibility in terms of repayment, uses of funds, and the timing of utilizing funds. A business might need to hire short-term workers ahead of a potential contract that sits in their sales pipeline. If the business owner waits until a contract gets signed (which can often take months) as part of the financing requirement, the business will receive the capital too late to properly prepare for the contract.
These supplier businesses—keen to compete for larger contracts with corporations and government as part of the industrial transformation underway—need lines of credit with greater flexibility to meet their larger-scale needs so they do not face the all-too-common chicken-and-egg problem impeding growth: Once a business gets a bigger contract, it becomes easier to access a line of credit; but the business needs the line of credit in order to get the bigger contract.
Third and finally, it’s time for committed financial institutions to create a scalable, more efficient lending process. These processes should take into consideration the needs of small businesses; for example, by utilizing alternative metrics such as sales data, customer testimonials, net promoter score, AI-generated success markers, and other data-rich metrics.
Alternative, aka “nonbank” lenders such as Kabbage, Fundbox, and Bluevine have been using AI-powered solutions to quickly assess financial health for some time now. Traditional financing institutions are finally catching up, as documented in recent coverage by Forbes, increasing investment in AI research and AI-powered solutions. Even though nonbank lenders have led the adoption of new technologies, banks are following suit to remain competitive in the market.
Meanwhile, as a precautionary matter, we should heed the Treasury Department’s recommendation last year that regulators “continue to coordinate their approach to emerging technologies, such as AI.” For now, there is supervisory policy related to AI and novel underwriting mechanisms to protect borrowers.
Implementing better line of credit solutions is easier said than done—but clearly possible
For structural reasons, financial institutions are wary of providing more and different line of credit solutions. Specifically, the drawdown facility that owners value also makes forecasting and managing risk more challenging for institutions. Providers of capital do not know when an owner will draw down the dollars, nor do they know the timing of repayment. This is why lenders favor term loans and their predictable, fixed features. The drawdown facility also requires a higher level of administrative servicing, which leads to a more active relationship with the borrower and thus higher transaction costs. Taken together, these factors may increase an institution’s real and perceived risk and costs—and limit the availability of lines of credit in the market.
One proven policy approach would be to extend usage of the Treasury Department’s State Small Business Credit Initiative (SSBCI), specifically to spur utilization of more lines of credit solutions. SSBCI funds state-level credit support programs, including capital access programs, loan guarantee programs, loan participation programs, and collateral support programs. These programs, which have resulted in an estimated $3.1 billion in new financing since inception, have enabled a broad range of capital providers—banks, alternative lenders, and credit unions—to mitigate risk while expanding access to capital.
More states could use the existing program architecture and potentially add their own funding to expand the supply of lines of credit available. The SSBCI Loan Guarantee Program in Florida, for example, allows small businesses to obtain lines of credit financing as well as term loans. If more states utilize loan guarantee programs to provide line of credit financing, financial institutions will have more security, in the form of a partial government guarantee, to approve line of credit applications.
That de-risking approach has proven itself for decades, helping millions of small businesses, farmers, home mortgage borrowers, and others. Momentus, an alternative lender that participates in the SSBCI program, believes that SSBCI can improve access to lines of credit via two specific enhancements: 1) expanding the approved types of line of credit alternative lenders to include community development corporations, other economic development agencies, and nonprofit lenders; and 2) making the guarantee cover lines of credit up to seven years, and not renewed annually like other loans.
Looking ahead
As we focus on options for fueling economic innovation and good jobs through the nation’s determined small and midsized businesses, we must be mindful of the current economic climate and risks on the horizon. The last several years have seen sharp inflation that has only made access to capital more difficult, since the cost of capital is higher for both capital providers and borrower businesses. New and proposed tariffs, or taxes on imported goods, are expected to fuel further inflation, and are already contributing to market uncertainty and heightening the challenges for small businesses.
As explained in this report, lines of credit are extremely attractive to business owners in normal conditions. Demand for them is even greater in the context of macroeconomic uncertainties—playing out alongside what could be a once-in-a-generation, inclusive industrial transformation in the U.S. Providers of financial capital, both public and private, must take a lesson from their prospective business owner clients: First, they can grow by increasing the number of lines of credit solutions to make this invaluable financing more available; second, they can innovate on underwriting and other features of the solution itself to make it more accessible.
We should continue to advocate for reducing the capital market’s overreliance on personal guarantees, advocate for legislative action for an SBA-guaranteed line of credit product, and enhance the SSBCI to make it easier for the providers of capital and the entrepreneurs in need of that capital to do business. It will take strong leadership to drive the change we want to see, but the evidence and innovation speak for themselves. These are not bets on the unknown.
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