Abstract
The purpose of this paper is to document and explain the state by state variation in commercial bank lending to small businesses during the Great Recession. To accomplish this purpose will require several steps. These steps include showing the evidence of the variation in lending across states, the theoretical causes and the empirical findings of a capital supply gap based on market imperfections and employing OLS estimation method on carefully selected economic variables. The empirical results indicate that economic conditions, borrower characteristics and lender characteristics influence lending variation where these results can help in policy formulation.