Small Business Lending Research Articles

Paducah Bank’s Positive Impact on the Community through Small Business Lending

Small business lending by community banks has fallen in recent years due to community banks being acquired by larger counterparts (Jagtiani and Maingi, 2018). Regulatory requirements have incentivized larger banks to acquire smaller banks (Bonilla et al., 2018). To compete against larger competitors, community banks are taking a relationship based approach to lending (Bonilla et al., 2018). These institutions are uniquely suited for small business loans in that they know their community and their client base. The purpose of this paper is to examine a small community bank and assess their small business lending.

Shaping Small Business Lending Policy Through Matched-Pair Mystery Shopping

With limited financial sophistication, entrepreneurial consumers approach the financial marketplace more like retail financial consumers than like business customers. However, an assumption of both legislators and regulators is that business borrowers are more financially savvy than consumer borrowers and thus do not require protections that are as broad reaching. This gap between marketplace policy protections and the lived reality of the vast majority of small business entrepreneurs sets the stage for entrepreneurial consumers to fall through the regulatory cracks, creating the potential for exploitation and abuse. This situation may be exacerbated for minority entrepreneurs, who belong to protected classes that generally are more vulnerable to exploitation in marketplaces, including the small business lending marketplace. This article details the current status of the policy gap relative to minority entrepreneurial consumers and presents a matched-pair mystery shopping study to demonstrate the critical need for reliable, primary data to inform regulatory agencies as they work to implement appropriate protections to ensure equal access to credit across the small business lending marketplace.

Collateralization and distance

Abstract This paper examines how collateralization in small business lending varies with bank-borrower proximity. Our analysis establishes a robust inverse relationship between distance and collateral: Borrowers located in the vicinity of the bank face higher collateral requirements. The estimated relationship is independent of the allocation of decision-making authority within the lending organization, competitive pressure in the local credit markets, or risk rating of the borrower. Our findings seem consistent with the notion that distance reflects transaction costs associated with the assessment, inspection, and possible repossession of collateral.

Oil and gas development and small business lending in U.S. nonmetropolitan counties

ABSTRACTHow does the presence or absence of small business loans affect the emergence and development of rural businesses in traditionally underserved areas? Further, how has capital-intensive oil and gas development contributed to these lending patterns? In our ongoing work, we have established that locally oriented businesses such as small manufacturing establishments and retail outlets are associated with many beneficial local outcomes and promote nonmetropolitan community resilience. Using a longitudinal dataset based on annual public disclosures, we employ data on lending in more than 3,000 United States counties to build analytical visualizations. We provide relevant documentation through spatial statistics for future research on small business lending in underserved nonmetropolitan communities.

How does soft information about small business lending affect bank efficiency under capital regulation?

In this paper, we develop a capped call option model to evaluate the equity of a bank under capital regulation. A capped type of credit risk from the performance of relationship borrowing firms is explicitly considered, captured by a mechanism through borrower soft information that the bank produces and accumulates. We study the impact of soft information for small business lending on the optimal bank interest margin, i.e., the spread between the loan rate and the deposit rate of a bank. Our findings show that favorable soft information increases small business lending at a reduced loan rate (and thus at a reduced margin), and further lowers bank equity risk and enhances efficiency gains from soft information acquisition when borrower dependent on bank financing is heavy. Moreover, we account for the capital regulatory environment stringent to small business lending that increases bank equity risk and decreases soft information efficiency gain. Our results have important bank interest margin implications in terms of achieving efficiency gain and lower risk exposure, which might conflict with capital regulation aiming to promote financial stability.

Gender Discrimination in Small Business Lending. Evidence from a Lab in-the-Field Experiment in Turkey

We implement a lab-in-the-field experiment with 334 Turkish loan officers to document gender discrimination in small business lending and to unpack the mechanisms at play. Each officer reviews multiple real-life loan applications in which we randomize the applicant's gender. While unconditional approval rates are the same for male and female applicants, loan 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 this discrimination is strongly concentrated among young, inexperienced, and gender-biased loan officers. Discrimination mainly affects female loan applicants in male-dominated industries, indicating how financial frictions can perpetuate entrepreneurial gender segregation across sectors.

Small Business Lending and Social Capital: Are Rural Relationships Different?

We test whether rural versus urban location, and the amount of social capital present in those locations, influence the performance of Small Business Administration (SBA) 7(a) loans originated between 1984 and 2012. On average, we find that rural loans are about 11% less likely to default than urban loans, and that a standard deviation increase in social capital reduces default by about 5%. Surprisingly, these two effects are largely independent of each other, even though social capital is substantially higher in rural places than in urban places. Our findings advance the small business lending literature and offer insights for a more efficient allocation of SBA funds.

The Real Effects of Geographic Lending Disclosure on Banks

The Community Reinvestment Act requires banks to disclose the geographic distribution of their small business lending, which informs the public about their performance in meeting the credit needs of local communities. We investigate whether such disclosures increase public pressure and thus have real effects on reporting banks. We exploit the 2005 reform that exempted the geographic disclosure requirement and thus allowed banks perceiving high disclosure costs to stop doing so. Using a large sample of exempt banks, we find that after the exemption, non-disclosing banks, relative to those that continue to disclose lending distribution, experience a decrease in non-performing commercial loans but not for other types of loans. The decrease is stronger for banks under more scrutiny by community organizations prior to the exemption. Together, the findings suggest an improvement in loan underwriting quality of non-disclosing banks due to reduced public pressure.

Are Credit Markets Still Local? Evidence from Bank Branch Closings

This paper studies whether distance shapes credit allocation by estimating the impact of bank branch closings during the 2000s on local access to credit. To generate plausibly exogenous variation in the incidence of closings, I use an instrument based on within-county, tract-level variation in exposure to post-merger branch consolidation. Closings lead to a persistent decline in local small business lending. Annual originations fall by $453,000 after a closing, off a baseline of $4.7 million, and remain depressed for up to six years. The effects are very localized, dissipating within six miles, and are especially severe during the financial crisis. (JEL G21, G34, L22, R12, R32)

Is there a Benefit from Reduced Regulation on Small Banks?

Since May 2015 several U.S. Bank Holding Companies (BHCs) have been newly classified as small banks by regulators, thus benefiting from a friendlier regulatory capital environment. Using a difference-in-differences setting, we show that less regulation on small BHCs boosts small business lending of the affiliated commercial banks. We employ various tests to demonstrate that these findings are attributable to a capital channel where increases in lending are driven by the preferential capital treatment granted to the small BHC. The regulatory capital relief also has some positive effects for the local economy. Overall, the effects of the regulatory capital relief for small BHCs are consistent with its desired policy objectives.

Can Small Business Lending Programs Disincentivize Growth? Evidence from India's Priority Sector Lending Program

Programs to direct finance to small firms are ubiquitous. We study their real-side effects for target firms, exploiting the discontinuities in eligibility in such a program in India. We show that small firm lending programs can slow real growth. Several robustness, placebo, heterogeneity, and external validation tests as well as extensive margin tests are consistent with such distortionary effects. These findings collectively show that financial constraints matter: they shape how firms form and grow. Firms give up growth for better financing access but in doing so, they distort their growth trajectories by remaining small for longer periods of time.

THE STATE OF SMALL BUSINESS ENTREPRENEURS AND THE DYNAMICS OF THEIR DEVELOPMENT

The purpose of the study is to analyze the current state of activity of small businesses based on the study of their dynamics of development and functioning. Research results. Summarizing the research findings, it can be stated that in the Small Business, as an institutional sector of the economy, has long been dominant in the number and volume of production in the leading countries of the world. Formation of small business in Ukraine occurred under difficult economic conditions, which was caused by the fall in production, intense inflationary processes, and the destruction of the national economic complex and the deterioration of the material position of the majority of the population. Today, the dynamic development of small business is an important way of mobilizing the endogenous potential of the regions, as a means of solving many social problems. Given the socio-economic conditions of the domestic economy, it is appropriate to emphasize that the creation of favorable conditions for the development of small business in the regions depends to a large extent on the complex of relevant actions and activities of local executive authorities and local self-government bodies, which, in turn, should be implemented in regional policy. Today, there is a need for full-scale state support for small businesses: open access to information, free consultations, assistance with paperwork, and more. It is necessary to implement a policy that will activate entrepreneurship, will provide every beginning entrepreneur with the opportunity to contact a specialized information or consulting center to find out all the issues. Therefore, by analyzing the main trends of small business development, we can identify the most priority areas for stimulating and activating entrepreneurial potential in Ukraine, such as: ensuring a stable tax system; stimulating investment and innovation in the economic sector; reduction of excessive fines and sanctions; export promotion; expanding opportunities for duty-free supplies of domestic goods abroad, including to the EU; development of state support for entrepreneurship, creation of a strong legislative base; increase of social protection of business; introduction of new opportunities for small business lending and financing, etc. Conclusions. Therefore, the socio-economic development of Ukraine depends on the effective functioning of small business and creation of optimal conditions for its development, and therefore sufficient support for this particular sector of the national economy should become a priority of the public sector, which will ensure the transition of the economy to a qualitatively new level.

Policy externalities and banking integration

Can policies directed at the banking sector in one jurisdiction spill over and affect real economic activity elsewhere? To investigate this question, I exploit changes in tax rates on bank profits across US states. Banks respond by reallocating small business lending to otherwise unaffected states. Moreover, counties in non-tax-changing states that have more exposure to treated banks experience greater changes in lending, which in turn impacts local employment. The findings demonstrate that policies aimed at the banking sector in one jurisdiction can impose externalities on other regions. Critically, financial linkages between regions serve as the transmission channel for these policy externalities.

Modelling trust evolution within small business lending relationships

Trust is a key dimension in the principal-agent relationship and it has been studied extensively. However, the dynamics, evolution, and intrinsic motivation and mechanisms have received less attention. This paper investigates the intrinsic motivation of trust and it proposes a theoretical model of trust evolution that is based on the notion of ‘trust response’ and ‘trust spiral’. We then specifically focus on trust within the lending relationship between banks and small businesses, and we run numerical simulations to further illustrate the evolution of involved mutual trust over time. Our model provides implications for future research in both trust evolution and small business lending relationships.

Фінансова підтримка кредитування малого та середнього бізнесу за допомогою державних гарантій

Фінансова підтримка кредитування малого та середнього бізнесу за допомогою державних гарантій

Political Borders and Bank Lending in Post-Crisis America*

Abstract We study political influences on private banks receiving government funds. Using spatial discontinuities associated with congressional district borders, we show that recipient banks of the 2008 Troubled Asset Relief Program (TARP) program increased mortgage and small business lending by 23–60% more in census tracts located just inside their home-representative’s district than just outside; the effect also shows up in higher loan acceptance rates, and mortgages more likely to be impaired or in default. The effect is stronger when the representative voted for TARP, is politically powerful, connected to the financial industry, and when the bank is important in the district. These findings suggest that obtaining public funds subjects firms to political influences, which affects the quantity and quality of corporate investment because of political considerations.

The Costs of Better Lending Technology: The Decline of Small Businesses Lending

This paper evaluates how information technology (IT) improvements contribute to the decline of small business lending in the US commercial banking market from 2002 to 2017. I estimate a general equilibrium dynamic model with banks that differ in sizes and choose the level of transaction (hard information intensive) and relationship (soft information intensive) lending. The model shows that banks’ costs of evaluating borrowers’ hard information declined over this period by 46%, and small business loans fell by 7% (12% in the data). I find that banks’ higher reliance on IT to issue transaction loans is responsible for 37% of the decline in the data, and the consolidation caused by IT improvements caused 22% of the decline. Contrary to previous work, I find that when general equilibrium is considered, policy protecting small banks cannot increase small business lending.

Planning a loan in a small business

This article focuses on research of small business lending trends. Presented is a description of the current situation of small business in the national economy and the credit market. The problems encountered by enterprises when lending. Developed measures to promote lending to small businesses.

Missing the cut? How threshold effects distort U.S. small business lending trends

This paper estimates a downward bias over time in official U.S. lending data series widely used to proxy credit flows to small businesses. The bias occurs because the upper loan origination size threshold used to proxy this lending is fixed and denominated in nominal currency, so its real value erodes over time due to inflation. Some advocates invoke the apparent declining small business lending trend to push governments to implement support programs for these businesses. The paper offers preliminary fully inflation-adjusted multipliers applicable to nominal lending data so that analysts may observe more accurate trends and better inform policy decisions.

Shaping Small Business Lending Policy Through Matched-Paired Mystery Shopping

Abstract With limited financial sophistication, entrepreneurial consumers approach the financial marketplace more like retail financial consumers than business customers. However, the assumption of both legislators and regulators is that business-borrowers are more financially savvy than consumer-borrowers, and thus do not require as broad-reaching protections. This gap between marketplace policy protections and the lived reality of the vast majority of small business entrepreneurs sets the stage for entrepreneurial consumers to fall through the regulatory cracks and sets the stage for possible exploitation and abuse. This situation is potentially exacerbated for minority entrepreneurs who belong to protected classes that are generally more vulnerable to exploitation in the marketplace including the small business lending marketplace. In this paper, we highlight the current state of this policy gap in the marketplace relative to minority entrepreneurial consumers and present a matched-paired mystery shopp...