Small Business Lending Research Articles

Import competition, credit reallocation, and small business lending

Import competition, credit reallocation, and small business lending

Sustainable small business lending

Banks are the main source of external funding for small businesses. Thus, integrating sustainability considerations in small business lending can support global sustainability efforts. In surveying German banks, I show that banks are in the process of implementing sustainable small business lending. They put more emphasis on sustainability risks than on the transformation of the business model among small businesses. Sustainable relationship lending has some relevance in creating sustainability-related soft information, although respective hard information is preferred by banks. Banks and policymakers can use the findings to better apply sustainable small business lending to sustainability and resilience efforts.

Persistent Effects of the Paycheck Protection Program and the PPPLF on Small Business Lending

Persistent Effects of the Paycheck Protection Program and the PPPLF on Small Business Lending

The impact of fintech lending on credit access for U.S. small businesses

Small business lending (SBL) plays an important role in funding productive investment and fostering local economic growth. Recently, nonbank lenders have gained market share in the SBL market in the United States, especially relative to community banks. Among nonbanks, fintech lenders have become particularly active, leveraging alternative data and complex modeling for their own internal credit scoring. We use proprietary loan-level data from two fintech SBL platforms (Funding Circle and LendingClub) to explore the characteristics of loans originated pre-pandemic (20162019). Our results show that these fintech SBL platforms lent relatively more in zip codes with higher unemployment rates and higher business bankruptcy filings. Moreover, fintech platforms’ internal credit scores were able to predict future loan performance more accurately than traditional credit scores, particularly in areas with high unemployment. Using Y-14 M loan-level bank data, we compare fintech SBL with traditional bank business cards in terms of credit access and interest rates. Overall, while not all fintech firms follow the same approach, we find that fintech lenders could help close the credit gap, allowing small businesses that were less likely to receive credit through traditional lenders to access credit and potentially at lower cost.

Impact of mobile banking on small business lending after bank branch closures

We provide new evidence on the substitute role of mobile banking in small business lending after banks close branches. Compared to the matched bank-counties with similar economic conditions and bank financials, small business lending in the treatment counties decreases 0.064 million (equivalent to 18.8%) less after branch closings for banks with mobile apps than banks without mobile apps. The effect is more pronounced in high-income census tracts and for high-rated apps, suggesting that high-income customers and customers whose banks provide better mobile apps are less affected when banks close branches. We do not find a significant impact of having apps on small business lending when banks increase the number of branches. However, the effect of having mobile apps increases with closed branches' years of service. Our results imply that bank branches are still important in providing credit to the local communities. Mobile banking helps preserve the existing customer-bank relationship but cannot reduce information asymmetry.

The impact of the Paycheck Protection Program on the risk-taking behaviour of US banks

The economic impact of the COVID-19 pandemic placed many small businesses across the US in financial distress. In response to this, in March 2020 the US government introduced, as part of the CARES Act, the Paycheck Protection Program (PPP) intended to provide relief to small businesses and to preserve jobs during the pandemic. The latter resulted in three waves of funding distributed to small businesses through SBA approved lenders, mainly represented by US banks. By using a panel dataset of 4610 banks over the period Q1 2019–Q4 2020 and by employing a difference-in-differences approach (DiD), I investigate whether participation in the Paycheck Protection Program affected community banks’ credit risk-taking behaviour in the post-PPP period, compared to their non-community banking counterparts in the US. I find that the Paycheck Protection Program led community banks to decrease their risk appetite outside of the program relative to non-community banks, consistent with their greater exposure to the commercial real estate sector, heavily hit by the pandemic. My results are robust to a battery of robustness tests and identification strategies. In this research article, I offer novel evidence on the indirect impact of the Paycheck Protection Program as a government-funded stimulus program administered through banks by investigating the indirect effect of the Paycheck Protection Program on the risk-taking of US community banks that dominate lending of PPP loans as a result of their competitive advantage in soft information-intensive small business lending. Such evidence is informative to policymakers as they weigh the merits of various program options to combat the economic damage imposed by the COVID-19 pandemic and as they consider the design of economic stimulus programs in response to future economic crises.

Information Technology and Credit: Evidence from Public Guarantees

This paper investigates whether banks’ information technology (IT) can substitute for local branch presence in the provision of small business credit. Our identification strategy relies on loan-level data and the unique institutional features of the Italian public guarantee scheme during COVID-19. Despite the availability of online applications and low screening incentives, small business lending remains local even for first-time borrowers. However, IT partly mitigates the impact of local branch presence: banks with better IT provide more, cheaper, and faster guaranteed loans and lend more in areas where they have no bank branches, especially to first-time borrowers. This paper was accepted by Victoria Ivashina, finance. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2023.4957 .

Does Geographical Proximity Matter in Small Business Lending? Evidence from Changes in Main Bank Relationships*

AbstractWe examine the causal link between the geographical distance between firms and their main bank and the termination of main bank relationships, using the exogenous change in firm–main bank distances brought about by bank branch consolidations in Japan. Our findings are threefold. First, an increase in lending distance increases the likelihood that firms switch their main bank. Second, the average lending distance for firms that switched to a new main bank decreased after the switch. Third, the lending distance of new firm–main bank relationships after the switch had a positive impact on the probability of default of small firms.

Close competitors? Bilateral bank competition and spatial variation in firms’ access to credit

Abstract We interviewed 379 bank CEOs in 20 emerging markets to identify their banks’ main competitors. We show that banks are more likely to identify another bank as a main competitor in small-business lending when both banks are foreign owned or relationship oriented; when there exists a large spatial overlap in their branch networks and when the potential competitor has fewer hierarchical layers. We then construct a novel bilateral competition measure at the locality level and assess how well it explains geographic variation in firms’ credit constraints. We show that intense bilateral bank competition tightens local credit constraints, especially for small firms, as competition may impede the formation of lending relationships.

Is lending distance really changing? Distance dynamics and loan composition in small business lending

The increasing average distance between small businesses and their lenders has been used to argue that technological changes have allowed banks to lend at longer distances. Generally, studies assume that distance changes are uniform across loans and lenders. Our paper shows that, while average distance has increased substantially over the past two decades, banks themselves have not materially increased their lending distances. Instead, longer average distance was caused by a small number of banks that specialize in originating very small loans nationwide quadrupling their share of lending. Outside of these very small loans, small businesses remain dependent on local banks.

Economic Consequences of Transparency Regulation: Evidence from Bank Mortgage Lending

ABSTRACTWe examine the economic consequences of a rule designed to improve consumers' understanding of mortgage information. The 2015 TILA‐RESPA Integrated Disclosures rule (TRID) simplifies the mortgage disclosures provided to consumers. As a consequence, TRID‐affected mortgages become a less attractive investment opportunity to banks. Our main results document that mortgage applications affected by TRID are less likely to be approved following the rule's effective date. We find evidence consistent with both a decrease in consumers' information processing costs and an increase in banks' secondary market frictions, providing insight into the potential channels through which this reduction in mortgage credit operates. We also find that banks partially compensate for reduced mortgage lending by increasing small business lending, and that fintechs absorb mortgage demand in areas with reduced mortgage lending by banks. Our study documents real actions that firms take in response to disclosure transparency regulation and contributes to the literature on the economic consequences of such regulation.

BANK LENDING AS A FACTOR IN THE DEVELOPMENT OF SMALL AND MEDIUM-SIZED BUSINESSES IN KAZAKHSTAN

In modern conditions, one of the urgent tasks of the Republic of Kazakhstan is to maximise the development of small and medium-sized businesses. Small and medium business has a direct impact on the economic well-being of the state. And it largely depends on solving the problems of employment, filling the domestic market with domestic goods, replenishing the state budget and creating a competitive environment. The development of small and medium-sized businesses is a key tool for economic growth and socio-political modernisation.
 This article examines the dynamics of small and medium-sized business development in Kazakhstan, including indicators such as the contribution of small and medium-sized businesses to the country's gross domestic product, the number of small and medium-sized businesses registered and operating, and the number of people employed in this area, and analyses small and medium-sized businesses lending by second-tier banks for 2018-2020, which covers the period before the pandemic and during the pandemic. During the period of restrictive measures, the state provided support to small and medium-sized businesses in the form of tax exemptions, interest relief on loans previously obtained by businesses, and relief on rent payments. However, despite this, problems have been identified in this aspect. In order to eliminate the identified problems of small and medium-sized business lending, prospective directions for further development of small and medium-sized enterprises in the Republic of Kazakhstan have been developed.

Discriminatory Lending: Evidence from Bankers in the Lab

We implement a lab-in-the-field experiment with 334 Turkish loan officers to document gender discrimination in small business lending and unpack mechanisms. Officers review multiple real-life loan applications in which we randomize applicant gender. While unconditional approval rates are the same, officers are 26 percent more likely to require a guarantor when we present the same application as coming from a female instead of a male entrepreneur. A causal forest algorithm to estimate heterogeneous treatment effects reveals that discrimination is concentrated among young, inexperienced, and gender-biased officers. Discrimination mainly affects female loan applicants in male-dominated industries, indicating how financial frictions can perpetuate entrepreneurial gender segregation across sectors. (JEL C93, G21, G32, J16, L25, L26, O16)

The Racial and Spatial Impacts of the Paycheck Protection Program

The Paycheck Protection Program (PPP), with spending of nearly $800 billion, was the largest component in the United States’ economic response to the COVID-19 pandemic. The intention of the program was to provide emergency economic relief to small businesses and help them keep employees on their payroll. Critics of the PPP program feared that its reliance on private lending institutions would exacerbate racial and spatial injustice by mirroring existing inequalities in access to capital by race and across space. The authors compare PPP to existing residential and small business lending patterns, and test whether Black and Latinx neighborhoods were disadvantaged in receiving PPP loans. The authors find that majority Black and Latinx neighborhoods received disproportionately fewer PPP loans than majority White and Asian neighborhoods, but that policy changes during the third phase of the PPP resulted in better targeting of lending to lower-income areas, minority borrowers, and smaller businesses.

Commercial banks and small businesses relation and the role of the state in supporting them

In this article, we have considered the main aspects of credit relations between secondtier banks in Kazakhstan and small businesses. The current state of small business lending inKazakhstan was analyzed. The role and importance of the state in supporting small business atthe present stage is determined. The main state programs to support small business, their roleand contribution to the development of small business are considered. The significance of therole of state support in the formation and development of small businesses is established. Themain directions of state financing are analyzed on the example of JSC «Damu EntrepreneurshipFund». The experience of implementing a small business support program in Kazakhstan in sucha direction as women’s entrepreneurship was studied. The main problem areas in the developmentof small business are identified. The author’s recommendations on improving the relationshipbetween banks, small businesses, and the state are offered.

Industry Specialization and Small Business Lending

This paper examines the rise and competitive impact of industry-specialized small business lenders. Using loan-level data with detailed industry codes from the Small Business Administration (SBA), we document a recent increase in lenders that originate loans nationally but to a limited number of industries. We then examine the impact of these industry-specialized lenders on credit availability and banking competition. Exploiting the staggered entry of a large, specialized lender, we find significant increases in total SBA-backed lending with no evidence of substitution from other lenders. We then explore potential mechanisms behind the increase in lending.

Small business lending and the bank-branch network

I examine the role of bank’s distance to the borrower and the proximity of other lenders for the transmission of financial shocks across the bank network. I use a novel dataset of small business lending based on information from the Community Reinvestment Act, which measures lending at census tract groups within each county and yields rich variation in the bank–borrower and borrower–competitor distance. I document that small banks with increased liquidity from proximity to local oil booms, originate more loans to firms far from these booms, and lenders with above-average geographic exposure to residential booms reduce lending in census tract groups with stable house prices. Bank–borrower distance is important for credit expansions, with closer firms receiving more credit, but not for contractions. Proximity of competitors plays a key role: consistent with theoretical predictions, both credit expansions and contractions disproportionately affect markets where the bank faces higher competition.

Small business lending under the PPP and PPPLF programs

We use Call Report data to examine the effects of the Paycheck Protection Program (PPP) and the PPP Liquidity Facility (PPPLF) on small business and farm lending by individual commercial banks. As program participation was associated with small business lending, we adopt an instrumental variables approach to identify causal implications based on historical bank relationships with the Small Business Administration and the Federal Reserve’s discount window. Our results indicate that both programs encouraged lending growth over the first half of 2020. However, while the PPP encouraged greater lending across all banks, only small and medium-sized bank lending growth was significantly related to participation in the PPPLF.

Old Program, New Banks: Online Banks in Small Business Lending

Old Program, New Banks: Online Banks in Small Business Lending

The Role of Collateral in Small Business Lending: Evidence from SBA 7(A) Program

The Role of Collateral in Small Business Lending: Evidence from SBA 7(A) Program