We study the dynamic effects of interest rate shocks on small business lending by banks

and non-banks, through the lens of three channels affecting banks at different horizons:

core deposits, time deposits, and bank profitability. Using a shift-share design within a

dynamic panel setting, we show that rate cuts stimulate bank lending relative to non-

bank lending in the first year, in part through an inflow of core deposits, but migration

effects towards non-banks arise after three years of net interest income compression and

time deposit outflows induced by low rates, and get stronger thereafter. Our results

bridge the gap between the expansionary short-run effects and contractionary long-run

effects of low interest rates on bank lending. We highlight that substitution towards

non-banks can take place at business cycle frequencies, and should thus be taken into

account in the conduct of monetary policy.