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Who needs credit and who gets credit? Evidence from the Surveys of Small Business Finances

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  • Cole, Rebel A.

Abstract

In this study, we 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. First, do firms need credit? We 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. Second, do firms need credit but fail to apply because they feared being turned down? We classify such firms as “discouraged borrowers.” Like non-borrowers, discouraged borrowers have received little attention in the literature and often are pooled with firms who applied for, but were denied, credit. Discouraged borrowers outnumber firms that applied for, but were denied, credit by more than two to one. Third, do firms apply for credit, but get turned down? We classify such firms as “denied borrowers.” Finally, we classify firms that applied for, and were extended, credit as “approved borrowers.” Our results reveal strong and significant differences among each of these four groups of firms. Non-borrowers look very much like approved borrowers, consistent with the Pecking-Order Theory of capital structure. Discouraged borrowers resemble denied borrowers in many respects, but are significantly different along a number of dimensions. This finding calls into question the results from previous studies that have pooled together these two groups of firms in analyzing credit allocation. Finally, we find strong evidence that denied borrowers differ from approved borrowers across numerous characteristics, as previously documented in the literature. Of particular note, minority owned-firms, and especially Black-owned firms, were denied credit at a far higher rate than firms with owners who were white.

Suggested Citation

  • Cole, Rebel A., 2008. "Who needs credit and who gets credit? Evidence from the Surveys of Small Business Finances," MPRA Paper 24691, University Library of Munich, Germany, revised 15 Mar 2010.
  • Handle: RePEc:pra:mprapa:24691
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    More about this item

    Keywords

    availability of credit; capital structure; discrimination; entrepreneurship; small business; SSBF;
    All these keywords.

    JEL classification:

    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • J71 - Labor and Demographic Economics - - Labor Discrimination - - - Hiring and Firing
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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