Who needs credit and who gets credit? Evidence from the surveys of small business finances

TLDR: In this paper, the authors used data from the Surveys of Small Business Finances to classify small privately held firms into four groups based upon their need for credit, and found strong and significant differences among each of these four groups of firms.

About: This article is published in Journal of Financial Stability.The article was published on 2016-06-01 and is currently open access. It has received 93 citations till now. The article focuses on the topics: Credit rationing & Small business.

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Figure 1: Who needs and who gets credit? A sequential model

Frequently asked questions

Q1. What contributions have the authors mentioned in the paper "Who needs credit and who gets credit? evidence from the surveys of small business finances" ?

In this study, the authors use data from the Federal Reserve ’ s 1993, 1998 and 2003 Surveys of Small Business Finances to classify small businesses into four groups based upon their credit needs and to model the credit allocation process into a sequence of three steps. The authors classify such firms as “ denied borrowers. ” Finally, they classify firms that applied for, and were extended, credit as “ approved borrowers. ” their results reveal strong and significant differences among each of these four groups of firms. Finally, the authors find strong evidence that denied borrowers differ from approved borrowers across numerous characteristics, as previously documented in the literature. The authors classify those that do not as “ non-borrowers ; ” these firms have received scant attention in the literature even though they account for more than half of all small firms. 

Q2. Why do they find that credit is more available when they have more close relationships with their lenders?

Because of the relative opacity of small firms, those firms with strongerrelationships with their prospective lenders are more likely to receive credit. 

Q3. How long has the issue of availability of credit been studied by financialeconomists?

The issue of availability of credit to small businesses has been studied by financialeconomists for at least sixty years, dating back at least to Wendt (1946), who examinesavailability of loans to small businesses in California. 

Q4. What percentage of the firms that had no need for credit were in need?

During 2003, as the economy was recovering from 9/11 and the 2001-2002 recession,Need firms accounted for 49 percent of the sample. 

Q5. Why are firms with more liquid assets more creditworthy?

Firms with more liquid assets are thought to be morecreditworthy because they are more likely to be able to meet their current financial obligations. 

Q6. What was the percentage of firms that had no need for credit?

In 1993, near the end of the credit crunch that afflicted the U.S. economy following the1990-91 recession, Need firms accounted for 55 percent of the sample, but in 1998, when theU.S. was in the middle of a ten-year economic boom cycle, accounted for only 41 percent of thesample. 

Q7. Why do some firms have a negative ratio of debt to equity?

This is critically important because- 28 -evidence from the SSBFs reveals almost half of all firms do not appear to “need” credit and thatas many as one out of seven small firms has a negative ratio of debt to equity because their debtexceeds their assets. 

Q8. Why are creditors more likely to favor firms located closer to the creditor?

A creditor is expected to favor firms located closer to the creditor because thecreditor can more easily monitor firms in the nearby market areas.