Small Business Loans Research Articles

Did Biden-Harris’s reforms on the Paycheck Protection Program reduce racial disparities in lending?

AbstractIntroduced under the Trump-Pence Administration, the Paycheck Protection Program (PPP) provided short-term relief loans to small American businesses during the peak of the Coronavirus pandemic. The initial design of the PPP faced significant criticism from researchers due to racial disparities, among other issues, in its lending process. Minority groups received smaller PPP loan amounts during the original two tranches released in 2020. To increase equitable access for all, in February 2021 the Biden-Harris Administration enforced swift changes to the initial PPP aimed at favouring access to PPP loans for minority-owned small businesses that had been disadvantaged by the program’s original design under the Trump-Pence Administration. By exploiting a granular dataset of 1,759,270 PPP loans granted between Q2 2020 and Q2 2021 and by implementing a difference-in-differences approach (DID), this paper provides novel evidence on the effectiveness of the Biden reforms in reducing racial disparities within the Paycheck Protection Program. Indeed, we observe a significant increase in the volume of PPP loans granted to minority-owned businesses in the period following the Biden-Harris Administration’s reforms. Furthermore, among different minority groups, the reforms appear most effective for Native American minority groups (including American Indians, Alaska Natives, Native Hawaiians and/or Other Pacific Islanders), followed by Black Americans and Asian business owners. Our findings offer novel contributions to the existing literature on institutional discrimination, particularly regarding the initial PPP design. Our findings are especially valuable for policy makers as they underscore the importance of radical changes in addressing racial disparities. Our paper also offers evidence of how a public credit guarantee program should be designed to empower and promote economic inclusion for all, regardless of ethnicity, aligning with the UN’s Sustainable Development Goals.

Loan application due diligence and financing small firms in Africa

ABSTRACT Banks gauge and verify business potential when processing small business loan applications by conducting due diligence on the firm. Although research has examined the factors that influence small business financing, little attention has been given to understanding the due diligence process that informs credit decision making. We address this gap using signal theory to analyze and develop insights from 24 qualitative interviews. Our study identified 11 key hard and soft signals loan officers use to access small business credit risk during due diligence. The key signals include key person risk, change in leadership risk, articulation of company value, adaptation to change, separating business and personal finances, personal reputation, transparency and willingness to share information, data accuracy and completeness, regular account operation, faulty budget and turnover assumptions, and legitimacy of collateral. The implications for small and medium-sized enterprises finance theory and practice are discussed.

Digital Transformation in Financial Services and FinTech: Trends, Innovations and Emerging Technologies

Purpose: This research investigates the transformative impact of digital innovations within the financial services sector, particularly focusing on the evolution of digital banking and FinTech. The study aims to explore how digital banking products are being developed to enhance financial literacy and promote financial inclusion across diverse populations. Methodology: The research employs a comprehensive analysis of current trends and technologies, utilizing case studies and data-driven insights to assess the role of blockchain, artificial intelligence (AI), and machine learning in reshaping banking and financial services. The study examines the implications of these technologies on small business loans and wealth distribution. Findings: The findings reveal significant advancements in digital banking products, highlighting the increased accessibility and efficiency provided by these innovations. Emerging technologies have facilitated improved financial literacy and inclusion, particularly by enabling more accurate credit assessments and democratizing access to financial resources. The study underscores the pivotal role of AI in enhancing customer service through personalized experiences and predictive analytics. Unique Contribution to Theory, Policy, and Practice: This research makes a substantial contribution to academic theory by expanding the understanding of digital transformation in financial services. It provides critical insights for policymakers, emphasizing the importance of integrating technological advancements to foster financial inclusion and economic growth. Practically, the study offers strategic guidance for financial institutions seeking to implement innovative solutions, thereby improving service delivery and competitiveness in the evolving financial landscape. The research underscores the necessity for ongoing adaptation and investment in emerging technologies to meet the dynamic needs of consumers and businesses.

Political connections and credit access: evidence from small businesses and microenterprises in India

Abstract This paper examines the impact of political connections on credit access for small businesses and microenterprises (SBME) in India, utilizing data from the India Human Development Survey. While such connections can facilitate overcoming challenges like high transaction costs and incomplete credit markets, they may also impede equitable credit access. This study analyzes how political connections influence the loan amounts secured by households for business purposes in both rural and urban settings. It further dissects the broader impact of political connections, revealing their nuanced effects in relation to the nature of loan and income sources. Consequently, this research offers valuable insights for policymakers and practitioners, suggesting strategies that provide fair financial opportunities to ensure a level playing field for all SBMEs. Plain English Summary Empirical research shows political ties lead to inequitable loan opportunities for Indian small businesses. This research investigates the impact of political connections on securing loans for small businesses and microenterprises (SBMEs) in India. It finds that businesses with such ties are more likely to secure larger loans, creating an uneven playing field. It highlights the challenges in the credit markets of developing countries and emphasizes the importance of distributing loans equitably. The study calls for policies that ensure equal financial access for all SBMEs, promoting a balanced approach to overcome the complexities of political influence in credit access. It advocates for a fair and inclusive economic environment, supporting equitable growth and opportunity for all SBMEs.

Political Uncertainty and the Geographic Allocation of Credit: Evidence from Small Businesses

AbstractWe investigate how banks change the geographic distribution of their small business loan portfolio when they face political uncertainty in some of the states where they operate. Using exogenous variation in gubernatorial elections with binding term limits, we show that political uncertainty causes local banks to increase out‐of‐state lending to small firms, particularly those located in higher‐income areas. This effect follows a decrease in local lending and is stronger for banks that are more capital‐constrained. The increase in out‐of‐state credit leads to an increase in employment growth and net firm creation in sectors with larger capital needs.

Reimagining Peer-to-Peer Lending Sustainability: Unveiling Predictive Insights with Innovative Machine Learning Approaches for Loan Default Anticipation

Peer-to-peer lending, a novel element of Internet finance that links lenders and borrowers via online platforms, has generated large profits for investors. However, borrowers’ missed payments have negatively impacted the industry’s sustainable growth. It is imperative to create a system that can correctly predict loan defaults to lessen the damage brought on by defaulters. The goal of this study is to fill the gap in the literature by exploring the feasibility of developing prediction models for P2P loan defaults without relying heavily on personal data while also focusing on identifying key variables influencing borrowers’ repayment capacity through systematic feature selection and exploratory data analysis. Given this, this study aims to create a computational model that aids lenders in determining the approval or rejection of a loan application, relying on the financial data provided by applicants. The selected dataset, sourced from an open database, contains 8578 transaction records and includes 14 attributes related to financial information, with no personal data included. A loan dataset is first subjected to an in-depth exploratory data analysis to find behaviors connected to loan defaults. Subsequently, diverse and noteworthy machine learning classification algorithms, including Random Forest, Support Vector Machine, Decision Tree, Logistic Regression, Naïve Bayes, and XGBoost, were employed to build models capable of discerning borrowers who repay their loans from those who do not. Our findings indicate that borrowers who fail to comply with their lenders’ credit policies, pay elevated interest rates, and possess low FICO ratings are at a higher likelihood of defaulting. Furthermore, elevated risk is observed among clients who obtain loans for small businesses. All classification models, including XGBoost and Random Forest, successfully developed and performed satisfactorily and achieved an accuracy of over 80%. When the decision threshold is set to 0.4, the best performance for predicting loan defaulters is achieved using logistic regression, which accurately identifies 83% of the defaulted loans, with a recall of 83%, precision of 21% and f1 score of 33%.

A STUDY OF COVID-19 EFFECTS ON THE IDENTITY THEFT LANDSCAPE

This research studies the impact of COVID-19 on the identity theft landscape using historical data published by the Federal Trade Commission. The data set included information about the number of identity theft reports for each state per year over a 6-year period, 2017 -2022. The dataset also included the number of reports for each identity theft category, providing a holistic view of the identity theft landscape. The data showed a significant increase in the number of identity thefts across all the states in 2020 compared to 2019; the percentage increase ranged from 45% to 1,801.1%. This coincided with the pandemic, which started in December 2019. The top 5 states that had the highest percent increase in 2020 are Kansas, Rhode Island, Maine, Washington, and Illinois. Moreover, in the year 2020, there was a dramatic increase across all the states in the number of identity theft reports related to government documents or benefits fraud, ranging from 207.7% to 33,236% increase compared to the year 2019. This was due to the sudden increase in available funds to help Americans during the pandemic, including unemployment benefits, stimulus checks, small business loans, etc., along with the expedited process to distribute the funds, which created ideal conditions for cybercriminals, especially identity thieves.

Examining Collateral Prerequisites for Small and Medium-Sized Business Loans

This paper examines the factors that affect loan collateral specifically for SMEs in Lebanon, which is a country with a small, open emerging market economy. Collateral should secure the bank loan, but in practice it is adjusted according to other socio-economic criteria of the firms. This is especially true for SMEs and even more so for emerging countries. We propose in this research to illustrate the signals mobilized by banks when granting secured loans. The data on these variables come from the Lebanese Central Bank and the World Bank. They contain observations for two samples - 532 firms for 2019 and 561 firms for 2013. A set of factors influence the level of collateral required: those related to firm characteristics (relevant variables: age, size, audit of financial statements, provision of training to workers, private shareholder ownership, quality recognition, experiencing at least one bribe request, female manager), manufacturing (reflects economic sector), interest rate (reveals loan characteristics), and location in the capital (reveals loan market characteristics). The logistic regression estimates suggest that collateral required by older firms is higher even that SMEs have financial statement revised annually by external auditors. Size and interest rate contribute to lower collateral requirements. The consistency of results in the combined panel, 2013, and 2019 shows the reliability of the Lebanese Banking Sector norms and policies

The low odds of poor women with small business loans emerging from poverty: Critical social policy implications for Pakistan

AbstractThe government of Pakistan has been relying on the microfinance industry to reduce poverty among poor women in Pakistan. Using a theoretical framework that argues for limiting the abilities and capacity of existing microfinance services, we empirically investigate the odds of poor women remaining in poverty despite microfinance loan provision. We collected data from four provinces in Pakistan and analyzed it using multivariate logistic regression. Three‐fourths of the 442 women respondents live below poverty lines and are unable to emerge from poverty due to factors such as: housing instability, food insecurity, lack of savings, insufficient loan size and high installment rates, lack of gender solidarity through group borrowing, and threats of domestic violence. Lack of health insurance and critical health problems such as infectious diseases, having suffered an injury, chronic ailments, and mental health challenges are also preventing poverty emergence. We conclude by recommending key social policy development agendas that need to be introduced by the state, in partnership with the microfinance sector, to support women borrowers and help them emerge from poverty.

Do Government Guaranteed Small Business Loans Increase Employment? Evidence From US Counties, 2010-2016

Do Government Guaranteed Small Business Loans Increase Employment? Evidence From US Counties, 2010-2016

Analysis of drought coping strategies in northern Ethiopian highlands

One of the most detrimental concerns brought on by a changing climate that annually affects many people's lives is drought. Proactive and reactive drought coping and adapting mechanisms enable farmers to be resilient against climate–induced drought and improve the drylands' current disaster preparedness and early warning systems. The aim of this study was to assess proactive and reactive farmers' drought coping strategies at household level in Raya Valley in southern Tigray, Ethiopia. Agro–climatological based 246 households were sampled from the lowlands, midlands and highlands of the study area. The most effective drought coping mechanisms were discovered using a multinomial logit model. The study area had endured mild to extremely severe drought in the last three decades. The association between the various drought severity and household heads were significant (chi2 = 9.861, df = 3, p < 0.05). Proactive drought coping measures included collecting and storing pasture, conserving soil and water, weather prediction information to adjust saving and farming practices. Livestock feeding with roasted cactus cladode, small business loans, livestock selling, productive safety–net program, and food consumption reduction were the major reactive drought coping strategies. The proactive and reactive drought coping strategies identified in this study should be used to improve the existing disaster preparedness and early warning systems in the face of climate and weather extreme related impacts of climate variability and change.

Banking Market Structure and Trade Shocks

The structure of the local banking market, characterized by bank specialization and bank concentration, can affect credit and labor market responses to an import shock to the local economy. During the surge in U.S. imports from China from 1998 to 2006, small business loans (SBL) decline in counties that face a larger import shock. Bank geographical specialization positively affects banks’ SBL origination in response to the import shock. Consistent with these results, average employment declines in counties hit by the import shock, while higher bank specialization attenuates this negative labor outcome. Furthermore, in the face of import competition, credit support by specialized banks helps small businesses to respond to the heightened competition through firm innovation. We find little evidence for such stabilizing effects for bank concentration.

Analisis Pengoptimalan Aplikasi Mobile dan Sosialisasi Unit CDC (Community Development Centre) guna Mempermudah Pengisian Form Dana Pinjaman UMK bagi Mitra Binaan PT Telkom Pematangsiantar

This paper aims to determine the use of online applications at the CDC (Community Development Center) unit of PT Telekomunikasi Pematangsiantar. Based on the results of the analysis, the use of mobile applications as a medium to facilitate foster partners in filling out small and medium business loan funds forms. The mobile application is very effective in saving time, but there are some obstacles, namely the application often experiences errors. By optimizing the application, it is expected to be able to avoid these obstacles. Maximum utilization with an attractive appearance and ease of accessing applications that will increase the number of fostered partners in the CDC unit of PT Telekomunikasi Pematangsiantar.

Local banking markets and barriers to entrepreneurship in minority and other areas

This empirical study investigates the linkages among entrepreneurship in the form of establishment entry, local banking markets, and broadband availability, focusing on minority areas in the US. Lack of access to banks and lack of competition in the market for small business loans can make it more difficult for an entrepreneur to overcome the liquidity constraint to starting a new business. Broadband internet access can facilitate startups directly by enhancing firm profitability and indirectly by stimulating competition in the loan market, lowering the cost of access to finance, and enabling access to financial capital from fintech lenders. The barriers to new business creation erected by local banking markets are hypothesized to be even higher in minority areas, given the greater difficulty minority entrepreneurs face in raising financial capital. The empirical results show that broadband availability, local bank density, and competition in small business loans all facilitate startups. Broadband lowers barriers for entrepreneurs as hypothesized through both the direct and indirect channels. Broadband availability attenuates the barriers from insufficient access to local banks and lack of competition in small business loans from banks. For some industries, higher bank density and greater loan competition facilitate startups more in minority areas than in mostly white areas. Given that minority areas have many fewer banks per capita and much less loan competition than mostly white counties, the results imply that minority areas face even higher barriers to entrepreneurship from insufficient local formal financial resources. The moderating effect of broadband on local financial constraints applies even more so to Black communities; thus while the barriers for Black entrepreneurs may be higher, access to broadband has a greater alleviating effect on those barriers. Business creation in Hispanic areas also faces obstacles from the local banking environment, but broadband does not appear to help reduce them, although it still has a positive direct effect on entry. Additional evidence shows that broadband helped small businesses in minority areas procure more bank loans. Broadband access can thus help entrepreneurs in general, Blacks in particular, and to a lesser extent Hispanics surmount the liquidity constraint to starting a business. The implications of the results are discussed with reference to current and proposed policy to promote broadband availability, usage, and digital equity.

БАНКОВСКОЕ КРЕДИТОВАНИЕ В РОССИИ: ОСОБЕННОСТИ И ПЕРСПЕКТИВЫ ДЛЯ ФИЗИЧЕСКИХ И ЮРИДИЧЕСКИХ ЛИЦ

The article examines the specifics of the conditions for issuing loans, the procedure for checking the creditworthiness of the borrower, the issues of securing a loan and other nuances related to bank lending. The paper identifies the prospects and problems of the development of bank lending to individuals and legal entities, such as the reduction of bank liquidity, the significant impact of technological changes, the improvement of state support, which can contribute to the development of bank lending in Russia. The author defined the role of bank lending in Russia and studied the issues of state support, including surety programs for loans for small and medium-sized businesses, alternative forms of financing, etc.

Information asymmetry, external certification, and the cost of bank debt

This paper examines how the cost of bank debt reflects public information about borrower quality, and whether such information complements or substitutes the private information of banks. Using a sample of small business loans, and the award of a competitive public subsidy as an observable positive signal of external certification, we find that certification is associated with a lower cost of debt for subsidy recipients if the amount of private information of the lender is limited or the local credit market is less competitive. Public information loses importance once the bank accumulates information over the course of the lending relationship or the credit market is more competitive. Our results highlight a positive effect of external certification, driven by the signal it provides to both the lending bank and its competitors, and suggest that public and private information can be substitutes in the pricing of bank debt.

Is There a Trade-off Between Protecting Investors and Promoting Entrepreneurial Activity? Evidence from Angel Financing

AbstractThis article studies how changes in investor protection regulations affect local entrepreneurial activity, relying on the heterogeneous impact of a 2011 SEC regulation change on the definition of accredited investors across U.S. cities. Using a difference-in-differences approach, I show that cities more affected by the regulation change experienced a significantly larger decrease in local angel financing, entrepreneurial activity, innovation output, employment, and sales. I find that small business loans and second-lien mortgages became entrepreneurs’ partial substitutes for angel investment. My cost-benefit analysis suggests that the costs of protecting angel investors through the 2011 regulation change outweigh its benefits.

The effect of bank failures on small business loans and income inequality

Using variation in the timing and location of branches of failed banks we analyze its effect on income inequality. Employing a difference-in-differences specification we find that bank failures increased the GINI by 0.3 units (or 0.7%). We show that the rise in inequality is due to a decrease in the incomes of the poor that outpaces declines of the rest. We further show that individuals with lower levels of education exhibit a relatively greater decline in real wages and weekly hours worked. Exploring channels of transmission, we find income inequality is explained by a general decline in small business loans. This in turn reduces net new small business formation and their job creation capacity, a sector that hires a substantial share of low-income earners.

ANALISIS PENGARUH LITERASI KEUANGAN SYARIAH DAN KEUANGAN KONVENSIONAL TERHADAP PDB DI MASA PANDEMIC COVID-19

The aim is to find out how the influence of small business loans, operational costs, the Jakarta Islamic index, and covid 19 on economic growth. The methodology used in this research is descriptive quantitative analysis. The data used were obtained from OJK and BPS. The findings of the test results show that the business credit variable has a high level of significance and the data used is normally distributed. Practical implications in this research can be used as a form of government benchmark to maintain economic stability. Originality in this study was carried out using a multiple linear analysis model by looking at the influence between variables. The results of the tests carried out resulted in all variables having a significant effect.

Female small business owners in China: Discouraged, not discriminated

Using a unique small business loan application dataset from a peer-to-peer (P2P) digital loan platform in China, we show that female entrepreneurs are more likely to be discouraged from applying for funds after a failed attempt compared to their male counterparts. Female discouragement persists at different regional development levels and is prominent among those who need finance for working capital. Although digitization of financial markets has made external funding more accessible to small business owners, disclosing more information during the application process would help those discouraged from posting a new funding application.