A new comprehensive report on access to capital and credit for entrepreneurs and small businesses in Appalachia has provided an in‐depth look at the challenges facing the region’s business community. Prepared for the Appalachian Regional Commission (ARC) by Next Street Financial, the study reveals that, despite the critical role small businesses play in generating employment and fostering community identity, these businesses receive significantly fewer loans and less capital compared to their counterparts in other parts of the country. 

More than 99% of the businesses in Appalachia are small enterprises. More than three-quarters of these businesses—about 1.8 million—are nonemployer firms (businesses with no employees) and almost 400,000 are microbusinesses (firms with less than 10 employees). The analysis documents an annual capital shortfall approaching $70 billion and highlights not only the disparities in funding across geographic subregions but also the deepening challenges presented by bank consolidation and branch closures.

The report confirmed anecdotal evidence that ARC has received from Appalachian businesses about the pronounced disparity in the capital available to Appalachian businesses versus those elsewhere in the nation. “Small businesses throughout the rest of the country receive more loan dollars—per small business—than those in Appalachia,” said ARC’s director of research and evaluation Kostas Skordas. “Among the subregions, Central Appalachia receives the fewest loan dollars per small business, as well as the fewest loans. Economically distressed and at-risk counties, as we might expect, also fare poorly… and the gaps here are quite large."

The report also identifies key industries poised for growth in Appalachia. Business support & consumer services and retail industries are the predominant business types currently, but data show nonmanufacturing goods production—like farming, mining,  and specialty food production—and professional services & real estate are some of the fastest-growing sectors in Appalachia. Skordas adds that other ARC reports, like a 2023 report examining private-sector employment and a 2019 report examining the industrial make-up of the region, indicate that professional and technical service industries as well as social and health services are seeing an increase in employment. “However, high levels of employment don’t always equate to small business formation and growth in those same industries,” he said. 

In terms of current capital sources, the report underscores the continuing dominance of banks as the primary lenders in the region. “From 2017 to 2021, 97% of the total dollars loaned to small businesses throughout Appalachia originated from a bank," said Skordas. This reliance on traditional banking channels, however, becomes problematic in the context of dwindling physical branches and an increasingly consolidated banking sector.

The physical presence of financial institutions has long been crucial for building trust and facilitating lending relationships, particularly in the Appalachian landscape. "Historically,” said Skordas, “lenders and small businesses have relied on physical locations to develop relationships, which in turn can lead to increased lending activity. Lenders feel more comfortable offering loans to non-traditional applicants, and small business owners feel more comfortable seeking financing from people in the community.” When the smaller bank branches that foster these relationships are shuttered, lending activity suffers. 

Another insight from the study is regarding the significant demand for capital in the region. "One common misconception is that there are lower levels of lending and business activity in the region because the demand for capital isn’t there,” said Skordas. “However, based on this research—and also what we hear from businesses and stakeholders throughout Appalachia—there is an unmet demand for capital throughout Appalachia. But due to a number of barriers (e.g., lending being concentrated in large metro areas, consolidation of banks, branch closures, etc.), small businesses throughout the region don’t always have the same ease of access to the lending marketplace as those located elsewhere.”

The report was completed prior to Hurricane Helene, and Skordas said it’s reasonable to assume that certain difficulties have been exacerbated by the natural disaster. “For example,” he said, “considering the long and difficult recovery that lies ahead for the hurricane-impacted communities, some lenders may be more reluctant to extend capital to businesses in these communities. This could be due to the uncertainty of a recovery timeline and how the storm’s impacts (e.g., property damage, supply chain disruptions, decreased consumer spending) might affect the businesses’ ability to generate revenue. Additionally, the pause or decline in business activity related to Hurricane Helene—as well as any property damage incurred by the business—means that these businesses may now have less collateral and decreased revenue, which could limit their ability to obtain capital.” 

The report not only outlines the systemic challenges but also offers a series of recommendations designed to bridge the gap between capital demand and supply. Among these, the emphasis is on expanding institutional lending capacity, developing innovative loan products that better align with the needs of Appalachian businesses, and mobilizing a more diverse capital marketplace. “While small business owners have adapted to the changing lending landscape, it hasn’t been a seamless transition,” says Skordas. “Technical assistance and business support services are critical for helping small businesses navigate the changing lending landscape."

Taken together, the report paints a picture of a region with tremendous entrepreneurial spirit yet hampered by structural challenges. There is urgency here, too, as Appalachia has recently experienced a record number of new business starts, with more than 305,000 new business applications in 2021. As Appalachian communities continue to recover from events like Hurricane Helene and navigate an ever-changing economic environment, the need for targeted, innovative financial solutions has never been greater.

Learn more and see the full report at ARC.gov.