Survey Of Small Business Finances Research Articles

An Analysis of Standardized versus Relationship Bank Lending to Small Firms

Using the 1998 Survey of Small Business Finances and banking data to produce a bank-firm match, the author tests for evidence of standardized versus relationship lending methods in both total bank credit as well as credit emanating from the firm’s most important source of financial services, its primary bank. The author employs a two-step Heckman procedure to test the likelihood a small firm has bank debt, then conditional upon having debt, the level of credit outstanding. By comparing the determinates of bank and firm characteristics of primary bank credit with credit from all bank sources, the author finds relationship lending inherent within the primary bank, whereas competing bank sources employ standardized lending techniques such as credit scoring. Relating to credit availability, however, no clear dominance of one method over the other prevails, though empirical support is evident in primary banks providing more favorable credit conditions for riskier firms.

The Evolving Relationship between Community Banks and Small Businesses: Evidence from the Surveys of Small Business Finances

This paper uses data from the Federal Reserve Board's 1998 and 2003 Surveys of Small Business Finances (SSBFs) to examine the evolving relationship between community banks and small businesses. The SSBFs provide extensive data on the types of financial services used by small businesses and the sources of those services. These data allow us to answer a number of interesting questions regarding small business usage of community banks, including the following: To what extent do small businesses rely on community banks as providers of at least some financial services? What types of financial services are small businesses most likely to obtain from a community bank? What types of small businesses are most likely to obtain some or all of their financial services from a community bank? How have the answers to these questions changed between 1998 and 2003? In addition to providing detailed descriptions of the patterns of community bank usage observed in the data, we develop a simple reduced form model that uses both firm and local banking market characteristics to explain these patterns. We test a number of hypotheses regarding the extent to which community banks and larger banks differ with respect to the types of financial services provided to small businesses and the types of firms served. Finally, we discuss the implications of our findings for the future of community banking.

The Use of Alternative Employment Arrangements by Small Businesses: Evidence from the 2003 Survey of Small Business Finances

According to the CPS, employees in alternative work arrangements make up over 10 percent of U.S. workers. Because of the pervasiveness of these types of arrangements, it is important to understand why firms are choosing to use them. Using data from the 2003 Survey of Small Business Finances, we model the firm's decision to use alternative employment arrangements using a large representative sample of small businesses in the U.S. In general, our results are similar to previous establishment-level studies that have examined the use of these types of employment arrangements. However, many of these previous studies have been narrow in scope because of data limitations. We find evidence to support each of the following hypotheses: 1) firms may be using alternative employment arrangements (AEA) in an attempt to generate cost savings by substituting standard employees with AEA employees when internal wages and benefit costs are high; 2) firms may be using AEA to meet irregular product demand constraints; and 3) firms may be using AEA to take advantage of economies of scale for certain tasks or services. Additionally, we present some additional findings that add to the relatively limited establishment level literature on alternative employment arrangements.

Determinants of Loan Interest Rates: Evidence from the Survey of Small Business Finances (SSBF)

This paper examines the predictors of the cost of credit to small business firms in the US using data from the 2003 Survey of Small Business Finances (SSBF). We estimate an empirical model of the cost of the firm's most recent loan and control for firm, loan contract, and lending relationship characteristics, using the Two-Limit Tobit model. Our results indicate that firms with less borrowing risk associated with them are able to get favorable rates. The volume of the loan and collateral also reduces the cost of the loan. We also find that firms who have a longer relationship and a greater scope of relationship with the lending institution get lower rates.

Who Needs Credit and Who Gets Credit? Evidence from the Surveys of Small Business Finances

We use data from the Surveys of Small Business Finances to classify small privately held firms into four groups based upon their credit needs. Our results reveal strong and significant differences among each of these four groups of firms. Non-borrowers look very much like approved borrowers. Discouraged borrowers resemble denied borrowers in many respects, but are significantly different along a number of dimensions. Our analysis indicates that about one in three discouraged borrowers would have received credit if they had applied. Denied borrowers differ from approved borrowers across numerous characteristics, as previously documented in the literature. Of particular note, Black-owned firms were denied credit at a far higher rate than firms with owners who were white.

THE USE OF DEBT BY BLACK-OWNED FIRMS: RECENT EVIDENCE FROM THE 2003 SURVEY OF SMALL BUSINESS FINANCES

Black-owned firms are growing in terms of both number and economic importance. They play an important role in providing jobs as well as products and services, particularly in urban communities. In spite of this, prior research indicates that black-owned firms experience greater difficulty in securing sources of external capital. This study revisits this issue using newly released data from the 2003 Survey of Small Business Finances. Results reveal that black-owned firms were no less likely to have loans than white-owned firms controlling for firm and owner characteristics. Nevertheless, black-owned firms were still significantly more likely to be turned down for loans and more likely to refrain from applying because they assumed they would be turned down. Further, black firm owners who were approved for loans paid significantly higher rates of interest.

Starting Small and Ending Big -- The Effect of Monetary Incentives on Response Rates in the 2003 Survey of Small Business Finances: An Observational Experiment

In 2003, the Survey of Small Business Finances (SSBF), conducted by the Federal Reserve Board, implemented the use of incentives to increase response rates. This study examines the effects of some of the characteristics of the implementation - such as level of effort, time in queue, and consecutively-increasing incentive amounts - on unit response. Our estimates suggest that as the number of days increase between the initial screener and main interview, the probability of completion decreases. Similarly, as the number of days increases between each consecutive incentive offer the probability of completion decreases. Additional effort, as measured by additional calls, increases the probability of completion. Finally, each consecutive offer after the initial offer decreases the probability of completion.

Does Distance Matter in Banking?

Deregulation and technological change have reduced the transactions costs that led to the dominance of local financial service suppliers, leading some to question if distance still matters in banking. This debate has been particularly acute in small business banking, where transactions costs are believed to be particularly high. This paper provides a detailed review of the literature on distance in banking markets, highlighting the reasons why geographic proximity is believed to be important and examining the changes that may have affected its importance. Relying on new data from the 2003 Survey of Small Business Finances, we examine how distances between small firms and their financial service suppliers changed over the 1993-2003 decade. Our analysis reveals that distances increased, though the extent varied substantially across financial services and supplier types. Generally, increases were observed in the early half of the decade, while distances declined in the following five years. There was also a trend towards less in-person interaction between small firms and their suppliers of financial services. Nevertheless, most relationships remained local, with a median distance of 5 miles in 2003. The results suggest that distance, while perhaps not as tyrannical as in the past, remains an important factor in banking.

Banking Market Concentration and Credit Availability to Small Businesses

This paper examines how banking market concentration affects small businesses finance. Using the Survey of Small Business Finance, the empirical model show that bank concentration may adversely affect the amount of credit supplied to small businesses. We find that bank concentration decreases the L/C limits of firms significantly, while there is no statistically significant difference in L/C balance across banking markets. We also show that bank concentration lowers the overall debt-to-asset ratio of small firms that includes loans from nonbank institutions, suggesting that credit from non-bank institutions do not fully make up the effect of bank concentration.

Survey of Small Business Finances: Audio of Presentation

The Survey of Small Business Finances collects information from owners of a nationally representative sample of business enterprises on their financial relationships, credit experiences, lending terms and conditions, income and balance sheet information, the location and types of financial institutions used, and other firm characteristics.

Survey of Small Business Finances: Presentation

The Survey of Small Business Finances collects information from owners of a nationally representative sample of business enterprises on their financial relationships, credit experiences, lending terms and conditions, income and balance sheet information, the location and types of financial institutions used, and other firm characteristics.

Survey of Small Business Finances: Data Overview

The Survey of Small Business Finances collects information from owners of a nationally representative sample of business enterprises on their financial relationships, credit experiences, lending terms and conditions, income and balance sheet information, the location and types of financial institutions used, and other firm characteristics. Download the slides at: http://papers.ssrn.com/paper=1027927 Download the audio file at: http://papers.ssrn.com/paper=1028821

Availability of Credit to Small and Minority-Owned Businesses: Evidence from the 1993 National Survey of Small Business Finances

This article analyzes factors influencing the decisions of prospective lenders to extend credit to small and minority-owned businesses. Using data from a government survey of small businesses, the analysis reveals that prospective lenders (primarily commercial banks)are four times more likely to deny credit to firms owned by African-Americans than to firms owned by Non-Hispanic whites, and are twice as likely to deny credit to firms owned by Asian-Americans than to firms owned by Non-Hispanic whites. These differences in denial rates remain both statistically and economically significant, even after controlling for differences in the type and size of the prospective loan; in the age, experience, education, and creditworthiness of the firm’s primary owner; in the age, size, capital structure, profitability, organizational form, creditworthiness, and industry of the firm; and in the types and length of pre-existing relationships between the firm and its prospective lender. Interestingly, these differences in denial rates are significant only when the prospective lender is a commercial bank.

The determinants of online loan applications from small businesses

PurposeThe purpose of this paper is to examine both the characteristics of the business customers and the types of venture which make use of online loan applications. Despite the growth in the use of technology in banking and the advent of online banking, little research has been conducted on the factors underlying online loan application behaviour amongst business banking customers.Design/methodology/approachA multivariate analysis is conducted on a USA dataset to empirically test the hypotheses derived in this paper. The empirical evidence is drawn from the US Survey of Small Business Finances, which contains 3,561 sample ventures, representing 5.3 million small businesses in the USA.FindingsThe paper finds that online loan behaviour is largely determined by the characteristics of the entrepreneur, rather than that of the venture. It is also found that factors that trust, evident in the length of the relationship between the applicants and their primary lender, is important. Moderating these effects is further evidence that suggests the number of lenders and distance between lenders and applicants has a marked effect on online loan behaviour.Originality/valueThis paper identifies the factors determining small business online loan application behaviour. This is important because the nature of online loan behaviour is changing the existing relationships between banks and customers. Whilst online loan applications afford banks the opportunity to substantially reduce costs, the danger is that long term relationships with customers are harder to cement.

Alternative Methods of Unit Nonresponse Weighting Adjustments: An Application from the 2003 Survey of Small Business Finances

The 2003 Survey of Small Business Finances (SSBF) screening interview had significant unit nonresponse and therefore some type of nonresponse adjustment was deemed necessary. The approach used in the 2003 survey differed from that used in previous surveys. The current paper examines the impact of this technique on weights, point estimates and variance of the estimates by comparing the approach ultimately implemented for the 2003 survey to alternative approaches. The results using the 2003 SSBF hybrid method are very similar to the traditional weighting class method and the propensity stratification methods. Even though the hybrid technique did in some instances increase the variance of the weights over the traditional weighting class adjustment method, the differences were quite small. In addition the hybrid method decreased the variance for the weights as well as the some of the point estimates.

A Multistage Model of Loans and the Role of Relationships

The goal of this paper is to further our understanding of how relationships work in the borrower-lender interaction for a loan. A practical implication emerging from classical studies is that lenders overcome the problem of information asymmetry by collecting information about the borrowers through close relationships and using this information in credit approval and loan rate decisions. We test this implication in our paper using a robust sample selection methodology and data from the 1998 Survey of Small Business Finances. Our empirical model accounts for the entire fabric of the loan granting process within a unified framework, including (1) a borrower's decision to apply to a financial institution for a loan, (2) the financial institution's decision to approve the application for a loan, and (3) the loan rate the financial institution chooses for the borrower conditional on approving the loan. Our model also explicitly includes the analysis of discouraged borrowers (i.e., those that do not apply for loans because they believe they will be rejected). We find that relationships matter only in a borrower's decision whether to apply for a loan and in the loan approval/rejection decision by the financial institution. Relationships, however, are not important in determining the loan rate associated with the approved loan once the sample selection bias in the loan process is appropriately accounted for. Our conclusions remain robust to both relationship-driven loans and to the relative size of the business.

Alternative Methods of Unit Nonresponse Weighting Adjustments: An Application from the 2003 Survey of Small Business Finances

The 2003 Survey of Small Business Finances (SSBF) screening interview had significant unit nonresponse and therefore some type of nonresponse adjustment was deemed necessary. The approach used in the 2003 survey differed from that used in previous surveys. The current paper examines the impact of this technique on weights, point estimates and variance of the estimates by comparing the approach ultimately implemented for the 2003 survey to alternative approaches. The results using the 2003 SSBF hybrid method are very similar to the traditional weighting class method and the propensity stratification methods. Even though the hybrid technique did in some instances increase the variance of the weights over the traditional weighting class adjustment method, the differences were quite small. In addition the hybrid method decreased the variance for the weights as well as the some of the point estimates.

The impact of bank consolidation on small business credit availability

This paper examines how banking consolidation has affected small businesses credit. Using the Survey of Small Business Finances, the empirical model examines how credit supply to small firms responds to larger banks, and whether the non-bank supply of credit has offset decreases in credit from banks. Using an empirical model to correct for sample selection, large banks are found to lower the probability of obtaining credit for small businesses, and this lower probability is not offset by increased total loans. Non-bank institutions are found to make up much, but not all, of the decrease.

An examination of cost management behavior in small restaurant firms

The purpose of this study is to test cost management behavior of small restaurant firms and identify whether managers of these small restaurants behave differently depending on their management and ownership structure. The sample was comprised of 87 small restaurant firms identified from the 1998 Survey of Small Business Finances (SSBF). Cost of doing business, size of staff, and five performance measures were used as dependent variables. Independent variables included management and ownership type. Study findings identified significant differences in the profit margin depending on management type and ownership percentage of the primary owner. We also find that the cost of doing business (total expenses) varies depending upon single-family majority/minority ownership and the ownership percentage of the primary owner. The results support the notion that small restaurant firms are operated differently depending on their management and ownership structure.

Acquisition of Additional Equity Capital by Small Firms – Findings from the National Survey of Small Business Finances

While the importance of venture capital to the growth of small firms has been widely discussed during the past decade, little is known about the acquisition of additional equity capital, especially internal equity capital, by the majority of small firms in the U.S. This paper utilizes the information collected in the Federal Reserve Board’s 1993 and 1998 Small Business Finance Surveys to investigate the acquisition of additional equity capital by small firms. While the importance of public issue markets and venture capital investment in promoting the growth of small dynamic firms cannot be denied, the importance of external equity capital seems to be overstated. Only a very small number of small firms acquired additional external equity capital. It is the internal equity capital, not external, equity, that is one of the major financing sources for most small firms. We found that younger, lower quality firms were more likely to acquire additional internal equity capital than other firms. There appeared to be a “pecking order” of borrowing from internal sources to traditional lenders to non-traditional lenders. In addition, internal equity capital and debt acquired from traditional and non-traditional lenders appeared to be complementary financial resources.