This paper examines the impact of credit market competition on lending relationships, particularly in small businesses. The authors develop a model that suggests that in concentrated credit markets, creditors are more likely to finance credit-constrained firms because they can internalize the benefits of assisting these firms. The model predicts that in concentrated markets, creditors will smooth interest rates over time, leading to more favorable terms for firms, especially younger or more distressed firms. The paper uses data from the National Survey of Small Business Finances to test these predictions. The empirical results support the model's predictions, showing that young firms in more concentrated markets are more likely to obtain external financing and that the cost of credit is lower for these firms. The paper concludes with policy implications, suggesting that liberalizing financial markets may have both costs and benefits, and that the timing of such reforms is crucial.This paper examines the impact of credit market competition on lending relationships, particularly in small businesses. The authors develop a model that suggests that in concentrated credit markets, creditors are more likely to finance credit-constrained firms because they can internalize the benefits of assisting these firms. The model predicts that in concentrated markets, creditors will smooth interest rates over time, leading to more favorable terms for firms, especially younger or more distressed firms. The paper uses data from the National Survey of Small Business Finances to test these predictions. The empirical results support the model's predictions, showing that young firms in more concentrated markets are more likely to obtain external financing and that the cost of credit is lower for these firms. The paper concludes with policy implications, suggesting that liberalizing financial markets may have both costs and benefits, and that the timing of such reforms is crucial.