Business Borrowing Research Articles

Practice of international relations: potential for transfer to other spheres

In today's world, there is a close intertwining of academic disciplines and spheres of practical interaction. To identify a potential for transfer of international practices, the authors of this study attempt to elicit cases of successful transfer of practical experience from International Relations and world politics to other fields, as well as provide illustrative examples of parallel development of similar practices. As one of the most extensive practices in the realm of International Relations, diplomacy appears to contain a large number of relevant cases. Transfer and parallel development of negotiation techniques and mediation technologies manifest themselves both in the related sphere of domestic politics and in corporate culture. Another example of business borrowing international practices is the institution of industrial espionage, which nowadays might be compared to the institution of political-military espionage in terms of its scale and organization. The study also focuses on the phenomena of parallel development of social practices, namely emancipation. While it is regarded as a process of gaining legal independence in the sphere of law, in International Relations it denotes a rejection of the idea of domination of a certain order or ideological stance. The final part of the study is dedicated to the consideration of typologies of behavior, as well as analogies and metaphors, in various social spheres. Metaphors and analogies unite such seemingly distant disciplines as International Relations and folklore studies. In addition to allusions to foreign policy events, which appear with a certain frequency in mass culture, the authors also present possible parallels between the structure of fairy tales and that of political conflict. On the grounds of the case studies, the paper highlights the diversity of areas of international engagement that have directly or indirectly contributed, or could contribute, to the emergence and/or development of other practice areas.

Of interest? Estimating the average interest rate on debt across firms and over time

We use tax data from the Longitudinal Business Database to estimate the firm-level average interest rate on liabilities. The mean of this measure has similar time series properties to official statistics on the business borrowing rate, while also enabling detailed disaggregation across different firm types. We document significant variation in interest rate across firms in different industries, and across firms with different apparent borrowing risk. Finally, we compare firms self-reported views on whether they are finance-constrained to an estimated firm-specific interest rate premium, showing that: finance-constrained firms have higher interest rate premia than unconstrained firms; and that at least part of this difference in premia is explained by firm level differences in risk between constrained and unconstrained firms.

The impacts of fintech on small business borrowing

Consolidation in banking raise concerns about exclusion and predatory practices in small-business lending. Fintech lenders, largely unregulated credit providers with lending decisions and loan terms determined primarily by algorithm, have rapidly increased their lending to small businesses. I analyze loan-level data on consumer and small business loans from Fintech lenders and a comparison sample of small-business loans from regulated bank lenders. Fintech small-business loans charge average annual interest rates 3 percentage points higher than consumer loans from the same lender and 4 to 7 percentage points higher than small business loans from regulated banking entities. The large interest-rate premium points to the need for regulatory clarity and additional supervision to protect this crucial market segment from predatory non-bank lenders.

The Impacts of Fintech on Small Business Borrowing

Fintech lending to small businesses is growing rapidly in the United States, but the industry remains largely unregulated. In this study, I examine borrower outcomes when a borrower states that they are using credit from a fintech for small business purposes; I subsequently examine the differences in loan terms for regulated versus unregulated small business credit. I find that small business loans are charged a higher rate of interest than consumer loans from the same fintech lender, and also find that small business fintech loans have worse terms than small business loans from regulated banking entities. I propose a regulatory framework to offer small business borrowers protection from predatory fintech lenders and to clarify the proper regulators of this growing industry.

The State of Small Business Lending: Innovation and Technology and the Implications for Regulation

Small businesses were among the hardest hit in the Great Recession, accounting for more than 60 percent of the total jobs lost. The economic crisis was one focused on the banking sector, which is one reason for the disproportionately high impact on America’s small businesses, which tend to be heavily credit dependent. While some aspects of the economy have recovered in the years since, small businesses have struggled, primarily due to a lingering credit gap that is the result of banks being less likely to make the smaller dollar loans – those less than $250,000 – that small firms (more than 70 percent) seek. A rapidly-growing financial technology (fintech) sector has quickly stepped in to fill this gap, and incumbent banks are exploring a variety of partnership strategies with the new entrants. Yet, while the much needed increase in sources for financing has been welcome by small businesses, these innovative fintech lenders have sparked concerns around transparency and the high costs charged to borrowers. These concerns are exacerbated by a “spaghetti soup” of regulators, where no one federal entity has oversight, and protections around small business borrowing slip through the cracks. This paper takes a detailed look at the current state of small business lending, the causes for the persistent low-dollar loan gap, the solutions being driven by innovative fintech lenders, and the key concerns around oversight and regulation. Finally, our objective is to provide regulatory recommendations that will protect small business borrowers, while not dampening the innovation that has proven so promising for filling the gap in small business access to credit.

Proposed List of 'Competencies' for an Entry-Level Business Lawyer

This list is an initial list prepared by the task force noted above, most recently reviewed by the Legal Education Committee of the ABA Business Law Section at the Spring Meeting of the Section in April 2015. It will continue to be discussed, reviewed and revised, with an aim to providing more detailed materials for teaching or study by new lawyers, would-be lawyers, and trainers and employers of new lawyers. These would include, for example, specific scenarios and skillsets and checklists (such as “due diligence” or “closing documents”).This is by no means an all-inclusive list, and does not focus on specific areas, such as business formation, real estate, borrowing and lending, securities, intellectual property, but rather, more generic business lawyering skills. The Task Force recognizes that many larger law firms have their own competencies and training programs, so the focus of this outline is smaller firms, although these competencies may be applicable to mid-size and larger firms, as well.

Small Business Borrowing and the Bifurcated Economy: Why Quantitative Easing Has Been Ineffective for Small Business

In the early years following the financial collapse, federal officials and others believed that banks were not making loans to creditworthy small firms, who have accounted for most of the job creation in the United States in recent decades. Acting on this belief, a number of programs were created to increase bank lending to small firms. Overall, however, the data collected since the 2007/8 financial crisis suggest that the explanation for slow loan growth in the small business sector is not a result of supply constraints but rather a result of anemic loan demand among small firms. Thus, recent programs intended to increase small business borrowing through easing credit supply were doomed to fail. The weak demand for credit among small firms is representative of the sluggish performance of the small business economy postrecession, a marked contrast to the robust performance of larger firms and a reflection of a bifurcated economy.

Second–Order Gender Effects: The Case of U.S. Small Business Borrowing Cost

Gender–based differential treatment of business borrowers has been illegal for decades now. Therefore, any remaining gender effect is likely to be more subtle than before and second order in nature. Using 1,577 small businesses from the 2003 National Survey of Small Business Finances by the Federal Reserve Board, resolving the gender assignment problem, and isolating the supply effects, our tests detected a second–order gender effect in U.S. small business borrowing cost. Specifically, lenders charge female sole proprietorships an average of 73 basis points higher than male sole proprietorships. The methodology also ameliorates an interpretation problem common to first–order gender effects.

Small Business Borrowing and the Owner–Manager Agency Costs: Evidence on Finnish Data

This study investigates the impact that managerial ownership has on loan availability and credit terms. We find that managerial ownership is common in a sample of small and medium‐sized Finnish firms. Our results suggest that an increase in managerial ownership decreases loan availability. The results on loan interest rates suggest that though an increase in managerial ownership initially increases interest rates, the effect is reversed at higher levels of ownership. Collateral requirements increase monotonically with managerial ownership. Overall, the results suggest that banks view that there are agency costs involved with managerial ownership even in small and medium‐sized firms and that this is taken into account when lending to these firms.

Bond Indebtedness in a Recursive Dynamic CGE Model

In this paper, we present a minimalist version of a model of bond financing and debt, imbedded in a stepwise dynamic CGE model. The proposed specification takes into account the main characteristics of bond financing. Bonds compete on the securities market with shares, so that the yield demanded by the buyers of new bond issues increases as the cumulative bond debt grows relative to the stock of outstanding shares. Restrictions are imposed on the maturity structure of bonds, so that it is possible to attain a reasonable compromise between a realistic representation of the evolution of the debt, and the demands on model memory of past variables values which impinge on the current period. In the proposed model, the borrowing government reimburses bonds that have reached maturity, and pays interest on the outstanding debt. The prices of bonds issued at different periods and with different maturities are consistent with an arbitrage equilibrium. The supply of new bonds and of new shares is determined by the government's and business's borrowing needs. Security demand reflects the rational choices of portfolio managing households, following a version of the Decaluwe-Souissi model. These notions are illustrated with fictitious data in model EXTER-Debt. The full specification of the model is described, and simulation results are presented which demonstrate model properties.

Small Business Borrowing and the Owner-Manager Agency Costs: Evidence on Finnish Data

This study investigates the impact that managerial ownership has on loan availability and credit terms. We find that managerial ownership is common in a sample of small and medium sized Finnish firms. Our results suggest that an increase in managerial ownership decreases loan availability. The results on loan interest rates suggest that while an increase in managerial ownership initially increases interest rates, the effect is reversed at higher levels of ownership. Collateral requirements increase monotonically with managerial ownership. Overall, the results suggests that banks view that there are agency costs involved with managerial ownership even in small and medium sized firms and that this is taken into account when lending to these firms.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2005

The profitability of the U.S. commercial banking industry remained strong again in 2005, although it was a bit below the levels of recent years. Asset quality was still sound, but pressure on net interest margins lowered the return on assets, and an increase in equity relative to assets—owing to an accumulation of goodwill from recent large mergers—pushed down the return on equity more substantially (figure 1). Growth in industry assets remained solid. These bank profit and balance sheet developments were in large part attributable to the generally favorable financial and economic conditions of the U.S. economy in 2005. On the financial front, shortand intermediate-term interest rates increased as monetary policy tightening lifted the target federal funds rate 2 percentage points during the year (figure 2). Longer-term interest rates remained quite low, however, and thus the Treasury yield curve flattened considerably. Interest rates on fixed-rate homemortgage loans were relatively low over most of 2005, although they rose somewhat late in the year. Corporate risk spreads stayed quite narrow by historical standards. The U.S. economy continued to expand at a solid pace in 2005. In the household sector, consumer spending remained vigorous despite higher energy prices; it was supported by an improving labor market and gains in household wealth that reflected further substantial increases in house prices. The low level of residential mortgage interest rates last year spurred sales of both new and existing homes to record levels, although sales cooled somewhat late in the year. Mortgage refinancing rose for a time during the first half of the year but dropped back in the second half. In the corporate sector, investment spending expanded at a solid pace, buoyed by robust growth in final sales. Corporate profits posted strong gains, and firms maintained ample stocks of liquid assets. As a result, businesses financed much of their capital expenditures out of internal funds. Nonetheless, elevated merger and acquisition activity and a considerable rise in share buybacks contributed to a pickup in business borrowing, particularly in the form of commercial and industrial (CI large banks, $7.3 billion to $85.7 billion; medium-sized banks, $457 million to $7.2 billion; and small banks, less than $457 million. Data shown in this article may not match data published in earlier years because of revisions and corrections. In the tables, components may not sum to totals because of rounding. Appendix table A.1, A–E, reports portfolio composition, income, and expense items, all as a percentage of overall average net consolidated assets, for all banks and for each of the four size categories. Appendix table A.2 reports income statement data for all banks. 1. Bank profitability, 1990–2005

Do Banks Price Owner–Manager Agency Costs? An Examination of Small Business Borrowing

Ang, Cole, and Lin (2000) provide evidence that supports the theoretical work of Jensen and Meckling (1976) on agency costs. As a further examination, I conduct a test to determine the economic significance of owner–manager agency conflicts. Using the same data source and empirical framework as Ang, Cole, and Lin (2000), I test to determine if banks charge a premium when extending loans to firms with various ownership structures. In empirical tests, I find that banks do not require an owner–manager agency premium either through increased interest rates or through the requirement of collateral. Instead, I find that the interest rate is significantly affected by the length of the longest banking relationship, the number of banking relationships, firm age, and firm size. Additionally, the requirement of collateral is significantly affected by the number of banking relationships, the debt position of the firm, and firm size.

An Empirical Investigation of the Transmission of Canadian Monetary Policy

Introduction The Bank of Canada (BOC) has a particular view of how its monetary policy actions work their way through the economy. This paper is intended to investigate the extent to which empirical evidence matches the BOC's view. Specifically, it uses a vector autoregression (VAR) technique to determine how independent changes in the Bank's bellwether rate are transmitted to other interest rates, the exchange rate, various types of spending, and the consumer price index. Although somewhat similar work has been performed in the past, this is the first that has modeled the early stages of the transmission process so completely, and is the first that has used disaggregated measures of spending. The results for some stages of the process--other interest rates, retail sales, business borrowing, and inventories--are generally consistent with the Bank's view, but the results for other factors--exchange rates, imports, and exports--are less clear. Counterintuitive effects are found for consumer prices, although this practically disappears in an alternative specification. The organization of this article is as follows: The first section describes the theoretical transmission of monetary policy in Canada according to the BOC. Section two describes the VAR technique, and reviews some of the past applications of this technique to the Canadian economy. The next section describes the data and specifications used in the analysis; the following section reports the results of the analysis and provides some discussion. A final section describes possible enhancements to be pursued in future work and is followed by the study's conclusions. The Transmission of Monetary Policy Before undertaking an empirical study of the effect of BOC policy actions, it is useful to review the theoretical effect that monetary policy has on the economy. Briefly, the process is believed to work as follows: The Bank first takes actions that influence the deposits that private banks hold at the BOC, which influences the interest rate that private financial institutions pay to one another for one-day loans. These actions influence market-determined interest and exchange rates, which in turn affect several types of spending in the economy. These changes in spending eventually affect prices at the consumer level. What follows is a somewhat more complete description. For a definitive view of how the process is supposed to work according to the BOC, see Thiessen (1996) and other articles in the same volume. For an even more formal and slightly different explanation, see Duguay (1994). The first stage of the monetary policy transmission process is accomplished when the BOC transfers government deposits between private financial institutions and itself. If the Bank moves deposits out of these accounts, it will create a shortfall in the amounts that private banks hold to facilitate the daily clearing of payments among themselves. Shortfalls are costly to private banks because the BOC charges a relatively high penalty rate of interest when the shortfall occurs. The shortfall can be avoided if the private bank takes out a one-day loan from security dealers. The rate of interest on these loans is commonly called the overnight When the BOC moves deposits out of the accounts of private banks on a widespread basis, most banks will attempt to acquire loans. As they do, the demand for these loans increases and the rate will increase in response. An opposite response occurs when the BOC adds government deposits. Private banks will want to lend balances (because they earn no interest on excess balances), and this will cause a decrease in the rate.(1) Although the rate has little direct effect on the economy, it does have a strong indirect effect through its effect on longer-term interest rates and exchange rates. Medium-term rates of interest will depend a great deal on the expected path of this very short-term rate. …

Bank and Nonbank Competition for Small Business Credit: Evidence from the 1987 and 1993 National Surveys of Small Business Finances

Using newly available data from the Board's 1993 National Survey of Small Business Finances together with data from the 1987 survey, this article analyzes competition between banks and nonbanks in the U.S. market for small business credit. It explores nonbank competition as an explanation for the decline in banks' share of business lending by examining sources of credit used by small firms. It examines both the bank and nonbank shares of the dollar amount of credit to small businesses, including how these shares have changed from 1987 to 1993, and the incidence of small business borrowing, which is defined as the percentage of firms using credit of a certain type or from a particular source. Overall, the results indicate that small businesses obtained a higher percentage of their credit from nonbanks in 1993 than in 1987 but that this difference was small--about 2.0 percentage points.

Business borrowing and control: A theory of entrepreneurial types

A formal model of the bank borrowing decision by the small firm is provided to explain why some entrepreneurs borrow and others do not, and why some businesses grow and others remain stationary over long periods. Loan capital is productive and increases the firm's revenue but brings the business under the control of the bank. Profits generated by borrowing are a ‘good’ increasing owner utility whereas control is a ‘bad’, reducing it. The consequent tradeoff between borrowing and control implies that the business' optimum will involve borrowing less than the amount that maximises profits. If owner control-aversion is strong enough equilibrium may involve a corner solution with the business being entirely self-funding. The above result holds under conditions of symmetric information and zero credit rationing. Dynamic analysis distinguishes one group of entrepreneurs (Movers) whose preferences towards control evolve through time and their control-aversion diminishes, from another group (Stayers) whose preferences remain stationary. For the Movers borrowing increases over time up to a profit-maximising optimum whereas for the Stayers independence of control is maintained but at the expense of non-growth.

On the Firm's Production, Capital Structure and Demand for Debt

SOME economists have ignored corporate financing decisions on the assumption that they do not affect the investment and production decisions of firms. Yet even if this extreme position is accepted, firms must still make financing decisions which in turn have impacts on other sectors of the economy. Since interest payments on corporate debt are tax deductible, the reliance of firms on debt as opposed to equity financing directly affects the revenue the federal government collects through taxation of corporate profits. The corporate presence in bond markets and corporate borrowing from banks can be expected to affect both interest rates and the demand for money. Thus any large macro model must somehow account for the borrowing behavior of firms. Yet in assessing this portion of the 1965 Brookings Quarterly Econometric Model of the United States, de Leeuw (1965, p. 506) writes that the regressions for business borrowing are the least successful of the model. In this paper we derive an equation for the long-term debt ratio (capital structure) of a firm which can be estimated using available data. Unlike some recent qualitative studies' on the aggregate corporate debt ratio as related to inflation and taxation over time, our primary aim is to explain differences in the debt behavior among individual firms. Tobit estimation results, explicitly allowing for the fact that some firms have no long-term debt, are presented for both U.S. and Japanese firms. Our theoretical model implies that the long-term debt ratio which maximizes the present value of the existing stockholder's equity depends positively on the cost of equity and negatively on the cost of debt, capital productivity, and retained earnings. Our estimation results are generally in agreement with these expectations. In particular, we find that capital productivity, which has not been included as an explanatory variable in most previous studies,2 and the cost of equity capital are both important determinants of the firm's capital structure. Our empirical results also support the view put forward by Komiya3 that debt ratios for Japanese firms are higher than those for U.S. firms in part because the cost of equity has been historically higher in Japan than in the United States in relation to the cost of debt. Other important attempts to explain the debt ratio as a behavioral function of the price of debt and other variables include the studies of de Leeuw (1965) and Goldfeld (1969).4 Certain conceptual problems mar these studies, however. Short-term and long-term debt are not distinguished, despite the fact that long-term debt is usually used to finance capital spending while short-term debt is used to finance inventory and

ON THE DIFFERENTIAL EFFECTS OF TIGHT MONEY: A COMMENT

THE RECENT PERIOD of tight money has brought to the fore once again the issue of the uneven incidence of restrictive monetary policy. The construction industry, especially the residential end of it, has borne the major focus of public attention as well as apparently the brunt of monetary restraint. No less interesting, however, is the question of whether, under tight money conditions, the credit demands of small business firms are neglected relatively to those of large businesses. Since the commercial banking industry plays a critical role in both the financing of business and the transmission of monetary policy, an examination of the pattern of commercial bank lending to firms of various sizes during the past few years would be most illuminating. Unfortunately, data appropriate for such a study are unavailable. At best, it may be assumed that the present does not differ significantly from the past, and thus the differential impact of monetary policy during 1968-1969 ought to be similar to that experienced during 1955-1957. It is therefore doubly disturbing that two major studies, working with 1955 and 1957 data, derive contradictory conclusions. In the first of the articles to probe into the differential impact of monetary policy on business borrowing, Bach and Huizenga (B-H, hereafter) concluded that commercial banks did not discriminate against small businesses nor favor large firms.' In a recent article in this Journal, Silber and Polakoff (S-P) reexamined the B-H study, and using the same data, concluded that commercial banks did indeed discriminate against smaller firms.2 We do not intend to rework the same statistics for a third time, and thus this comment cannot resolve these diametrically opposed conclusions. On the other hand, while we appreciate the contributions of S-P, nonetheless we are convinced that the issue has yet to be brought to a satisfactory resolution. The purpose of this comment is to suggest that, on theoretical grounds, the S-P approach to discrimination is less appropriate than the B-H line of attack, although the latter also suffers from a faulty conceptualization of the problem. Furthermore, the empirical work of S-P, although more sophisticated than that of B-H, suffers from several faults. Either of these criticisms alone provides sufficient grounds for remaining skeptical about the S-P conclusion.

A STUDY OF REFINEMENTS IN THE INCIDENTS OF BUSINESS OWNERSHIP FROM THE MEDIEVAL PERIOD TO THE TWENTIETH CENTURY*

s of Doctoral Dissertations 59 could not freely create debtor-creditor relationships, for the presentday coincept of private business borrowing was not in existence; could not, under most circumstances, limit the liability connected with private business ownership; could not depend upon sufficient amounts of capital being available whenever and wherever needed; and could not avail themselves of a form of business organization similar to the modern corporation. Consequently, the opportunities for achieving variety in the apportionment of risk, income, and control were extremely limited. It is obvious, then, that many changes in business practice must have occurred between the early Middle Ages and the twentieth century, and that there must have been considerable thought of an economic nature concerning those changes. The procedure followed in this study has been to seek out major changes in the creation of the debtor-creditor relationship, in the concept of limited liability, in the conditions of capital markets, and in the forms of business organization; then to show how such changes improved or refined the previous methods of apportioning risk, income, and control; and finally, to present the dominant economic thought of the period regarding these changes. This content downloaded from 207.46.13.111 on Tue, 09 Aug 2016 05:40:00 UTC All use subject to http://about.jstor.org/terms

Review of the Year 1932

THE downward course of general business in the United States continued, with two moderate interruptions, during I932. Although the total decline for the year was large, it was somewhat smaller than that of I93I; and the average rate of decline was much slackened after the first quarter. Of the two interruptions to the decline, that of April was cut short by the second gold panic, and that of December occurred under conditions more generally favorable to sustained recovery (Chart i, p. 9). Whereas in I93I the dominant factor in renewing and prolonging the decline of business had been the world financial crisis, the critical influences during I932 were mainly domestic and centered about the second-quarter crisis in the federal budget. This crisis was accompanied by a second drive upon our gold standard, an episode following so closely upon the gold panic of September-October I93I that certain effects of the two episodes upon our credit and financial situations were all but continuous. The year was marked by steady and rapid decline in short term money rates; and the aggregate reduction for the year was greater than in the calendar year I930, though not as great as for the I2-months period ending in September I930. Even during the gold panic of the second quarter money rates fell, in response to the energetic easy money policy of the federal reserve system. With the passing of the second gold crisis, credit conditions improved; and the third and fourth quarters witnessed a vigorous upturn of member bank deposits, while loans were still declining. Many credit difficulties remain unsolved, but readjustment in bank credit has gone far and provides a basis for revival of business borrowing. Average wholesale commodity prices declined further during the year, but the total drop was only about half that suffered in I93I. Although the course of prices was downward as the year closed, there had been an important gain after the end of the gold panic. Hence the December figure was only moderately below that for June, and the last half of the year as a whole gave emphatic evidence of a slackening in the long slump of prices. In security prices the final half year was even more favorable: after the May-June panic had forced both bonds and stocks to extremely low levels, brisk recoveries occurred in the third quarter, and only moderate changes took place thereafter. Average prices of both bonds and stocks closed the year not greatly changed from the levels of January. In security markets, I932 brought striking evidence of a turn for the better.