The Role of the Banker-Small Business Owner Network in Inner-City Lending

Executive Summary Small businesses in the inner-cities continue to rely on banks to meet their credit needs, while banks consolidate their lending operations in remote locations, and rely more on heuristics that promote arms-length relationships, than on branch officers with access to vital private knowledge. We argue that small businesses in the inner-cities have very unique circumstances and the strong ties developed between branch officers and these business owners provide access to critical private knowledge that is otherwise unavailable. Therefore, if banks consider lending to this community a central part of their core strategy, banks must increase the role of branch officers because private knowledge is vital to the lending decision. Banker, Relationships, Information Accessibility, Trust, Strong Ties, Weak Ties Access to capital is the central issue.Entrepreneurial talent is not the prerogative of the wealthy, but is broadly distributed throughout the population as a whole. Without reasonable access to financing, many of our countries' most talented and aggressive small business owners will be cut out of the economic system. Innovation and business development will become a luxury reserved for the wealthy, and the economy as a whole will suffer (Hansen, 1983:p. 362363). The reality of the need for capital evident hi the quote above underline a critical challenge confronting small businesses, particularly those in the inner-cities. This problem of access to relatively inexpensive capital is increasing, given the continuous bank consolidation, government's competing interests, and federal budgetary constraints (Craig & Hardee, 2004; Hancock et al., 2005; Ou, 2005; Scott, 2003;). Solutions to the credit crunch facing small businesses appear unlikely to be solved through government entities. At the same time, the overall size of the banking industry has shrunk by over 40% through consolidations and mergers (Boyd & Graham, 1991; Miller, 1996; Saparito et al., 2004; Uzzi, 1999). Some have argued that this is a natural 'shaking out' of the industry to increase efficiency, while others have suggested that bank mergers create the opportunity for boutiques to fill a gap by undertaking lending in the less-profitable areas (Berger & Udell, 1995; Keeton, 1996; Peek & Rosengren, 1998; Stratum & Weston, 1996). Recent trends in bank financing approaches appear designed to ensure easier access to capital by small business owners (Brush et al., 2001 ; Greene et al., 2003). The establishment of private banking programs ( e.g. Bank of America, First Union, and Bank of Boston programs for small businesses), and venture capital funding have attempted to increase availability of financial resources to small businesses. However, small businesses continue to encounter funding problems. For instance, many small businesses are unable to take advantage of the venture capital financing option for reasons, such as unacceptable rates of return, concentration in low-profit industries, and incompatible risk exposure (Greene, et al., 2003; Mason & Harrison, 1999; Timmons & Bygrave, 1997). As a result, small businesses must continue to rely on bank financing as a primary source of financing. To meet lending requirements of banks, small businesses must provide specific information that is often unavailable. Much of that information is unavailable because small businesses either lack the expertise to provide it in the manner required or do not keep the appropriate records from which such information can be extracted (Ards & Myers, 2000; Connolly, 1998). As a result, banks may deny loan requests because searching for this information is deemed unprofitable. Other sources can provide critical information. Informal sources of information such as those gathered through long-standing relationships can provide significant insights into a borrower's ability to repay as well as the state of his/her business. …