Objective: The aim of this study was to compare conventional processing with nonlinear frequency compression (NLFC) in hearing aids for young children with bilateral hearing loss. Methods: Sixty-four children aged between 2 and 7 years with bilateral hearing aids were recruited. Evaluations of cortical responses, speech intelligibility rating, consonant perception and functional performance were completed with the children wearing their personal hearing aids with conventional processing. The children were then refitted with new hearing aids with NLFC processing. Following a six-week familiarization period, they were evaluated again while using their hearing aids with NLFC activated. Results: The mean speech intelligibility rating and the number of cortical responses present for /s/were significantly higher when children were using NLFC processing than conventional processing in their hearing aids (p < 0.05). Parents judged the children's functional real life performance with the NLFC hearing aids to be similar or better than that with the children's own hearing aids in both quiet and noisy situations. The mean percent consonant score was higher with NLFC processing compared to conventional processing, but the difference did not reach the 5% significance level (p = 0.056). An overall figure of merit (FOM) was calculated by averaging the standardized difference scores between processing schemes for all measures. Regression analysis revealed that, on average, greater advantage for NLFC processing was associated with poorer hearing at 4 kHz. Conclusions: Compared to conventional processing, the use of NLFC was, on average, effective in increasing audibility of /s/as measured by cortical evaluations, and higher ratings on speech intelligibility and functional performance in real life by parents. On average, greater benefits from NLFC processing was associated with poorer hearing at 4 kHz.