Characteristics of the businesses in the 1993 National Survey of Small Business Finance (NSSBF)

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Geography of Rural Financial Intermediation
Iowa State University
Department of Economics Prof. Maureen Kilkenny
Ms. Antara Jaitly Mr. Vitaly
Pecharsky Ms. Rebecca Hooper
ISU Statistical Laboratory
WFRRD
NCRCRD
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New Small Business CreditQuestions

• 1. Why cant our rural community young people
  get loans and start new businesses in town?
• 2. Are non-metro borrowers disadvantaged?

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Characteristics of the businesses in the 1993
National Survey of Small Business Finance (NSSBF)

• data publicly available since May 1999
• 4,637 businesses in the sample
• 23 owned by women or 50/50
• 72 founded by current owner
• 21 purchased
• 6 inherited
• 1 publicly traded

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97 have business checking accountsonly 30 have
business savings accounts

• 32 used business credit cards
• 37 used personal credit cards for business
  expenses
• 56 have 10K limits on their cards
• 58 spent less than 1,000 on credit cards in a
  typical month
• 77 say they pay in full each cycle

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non-metro businesses have longer relationships
with their banks
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About 85 of small businesses use a bank within
10 miles
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collateral, guarantees, and origination fees are
are usually required for any loan
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Explaining differences (inonmetro - imetro)

• 19 due to different characteristics of
  metro/non-metro
• loans /or borrowers
• 81 due to different behavior

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non-metro borrowers pay higher rates when
1.there are few other banks in the area 2.loan
is smaller 3.sales area is smaller 4.firm is
independent 5.business has higher ROE (is
riskier)
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non-metro businesses face more bank market power
85 of non-metro credit markets are highly
concentrated 42 metro
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things that matter in non-metro credit markets
dont matter in metro

• interest rates are not higher for metro
  businesses where credit markets are more
  concentrated
• metro businesses with higher ROE do not pay
  higher rates
• firm and loan size are not related to i rate paid
• independent/franchises do not pay different rates

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Metro borrowers pay lower rates when owners are
higher-educated

• Non-metro borrowers pay lower rates when they are
  minorities

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Why cant our rural community young people
get loans and start new businesses in town?

• MOST Likely reasons
• 1.They need to build up their own equity and
  collateral
• 2. Their new business must have adequate
  cash-flow

• Not likely reasons
• branch banks dont care
• urban areas/banks drain the savings/loanable
  funds out of rural communities

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2. Are non-metro borrowers disadvantaged?

1. fewer banks competing for borrowers
2. new/young borrowers denied more often?
3. smaller banks ??? higher costs

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95 carry fewer than 5 loans from owner(s) 91
have fewer than 5 general partners 88 have
fewer than 5 stockholders 2 have more than 10
stockholders
Characteristics of businesses in NSSBF, cont
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3 sought new equity capital that year fewer
than half (44) were successful
Characteristics of businesses in NSSBF, cont

• 7 from friends/family
• 9 from financial institutions
• 13 went public
• 32 from venture capital firms
• 64 from informal investors