SMALL BUSINESS ______________________________________________________________________________________________________________________________________________________________________

Office of Advocacy No. 175 

________________ 1996

U.S. Small Business 

Administration

_______________________________________________________________________________________________________________________________________________________ ______________

The Impact of Environmental Liability on Access to Capital for Small Business 1

by Public Policy Associates, Lansing, MI 48933-2408, contract no. SBA-8144-OA-94 _______________________________________________________________________________________________________________________________________________________ ______________

 

1

 This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts issued by

the Office of Advocacy U.S. Small Business Administration. The opinions and recommendations of the authors of this study do not necessarily

reflect policies of the SBA or any agency of the U.S. government. The administrator of the U.S. Small Business Administration Office of

Advocacy has determined that the publication of this periodical is necessary in the transaction of the public business required by law of this

agency. Use of funds for printing this periodical has been approved by the director of the Office of Management and Budget.

Purpose

In recent years, anecdotal evidence has suggested that the

liability provisions of various federal and state

environmental statutes are reducing (and in some cases

eliminating) access to much-needed loans for small

businesses. This study examined the actual extent to

which environmental liability has posed a barrier to

obtaining capital for these firms. In particular, it

analyzed the impact of factors such as environmental

risk, firm size, industry and profitability on loan

outcomes.

Scope and Methodology

Research methods included a literature review and

interviews with key experts in the areas of banking, small

business, insurance, and environmental law and

regulation. A detailed questionnaire was developed and

was administered to 1,322 small firms nationwide.

Univariate analysis and linear probability modeling were

used to analyze collected information. A risk index also

was developed, using the logit regression model to

capture differences among firms in exposure to

environmental risk factors.

Highlights

This report provides evidence that environmental liability

has indeed posed a barrier to obtaining capital for at

least some small businesses throughout the nation. The

survey indicated that more than one out of every 10

small businesses (or about 575,000 small firms with

employees nationwide) that had applied for a loan

reported such an effect. However, the results do not

support the assertion that this environmental liability

capital access barrier has fallen disproportionately upon

the smallest businesses. For the entire sample, firm size

played a minor role in determining both perceptions of an

environmental liability problem and the effect of

increased environmental risk on loan outcomes. Firms

within certain industries (such as manufacturers,

wholesalers, transportation/communication firms, and

business service firms) were more susceptible to

environmental liability problems.

Perhaps the most significant finding relates to the impact

of environmental risk on lending. First, it appears that

increased levels of environmental risk had only a limited

negative impact on the loan outcomes examined. While

environmental risk generally increased the probability

that firms would be rejected by at least one lender, it did

not have significant impact on firms’ abilities to obtain

the full amount they sought or to complete their intended

investment project. It is to be noted that it is not known

that the borrowing costs may be higher for them.

Second, although risk is not strongly related to loan

outcomes, it is related to firms' decisions about seeking

loans. The results show that among firms not seeking

loans, higher risk firms were more likely to report that

environmental liability concerns played a role in their

decisions.

RESEARCH

SUMMARY
Other findings include:

• Manufacturers did seem to suffer more negative loan

outcomes when environmental risk increased. In

particular, environmental risk had statistically

significant negative effects on their ability to obtain

the full amount they sought from banks and to

complete planned projects for which loan funds were

to be used.

• Just over one in five of the firms reporting that

environmental liability posed a barrier to capital,

said that lenders had rejected loans because of

environmental factors. Among this group, nearly 65

percent were completely denied funds by all lenders

approached.

• Firms that have perceived an environmental liability

barrier may have adjusted their financing strategies

to improve their ability to obtain capital. Firms

reporting that environmental liability posed a barrier

to capital also reported greater use of non-bank

sources of financing such as vendor credit, venture

capital/investment company funds, and leasing

arrangements.

• A number of secondary factors influence the effect

of increased risk on loan outcomes. For example, a

previous borrowing relationship with the lender was

found to ease the impact of environmental risk on

firms' abilities to obtain capital. In contrast, firms

seeking loans in order to comply with environmental

regulations (for example, to purchase pollution

abatement equipment) faced a more difficult time

overcoming environmental risk.

• Firms using business real estate as collateral were

less likely to obtain positive outcomes.

• Firms reporting that environmental liability posed a

barrier to obtaining capital said the number one

channel through which environmental liability worked

to restrict capital access was compliance costs.

Almost half of these firms reported that compliance

costs were a barrier, with almost one in five stating

that they completely blocked access to capital. More

than 22 percent cited the costs of bank-imposed

environmental inspections, while 21.3 percent

reported that banks had directly denied them loans

because of the lenders' perceptions of the firms'

environmental risk.

• Almost one-third of the firms affected by

environmental liability said that federal regulations

were primarily responsible for their capital-related

problems, compared with only 14 percent citing state

regulations as the more serious problem. State

hazardous waste laws were deemed to be the most

significant specific source of problems.

• The percentage of firms that perceived an

environmental liability barrier varied greatly by

region. At least 15 percent of the firms within SBA

Regions I, III, V, and IX reported a problem. In the

six other regions, not more than 4 percent of firms

reported a liability-related barrier.

Conclusion

The report concluded with recommendations for a

number of policy changes and other strategies to

minimize the barrier that environmental liability poses on

access to capital. The recommendations include the

following:(1) develop networking programs for lenders

and small businesses to help both groups better

understand the actual significance of various

environmental risks to lending decisions, and to

determine what can be done to work through these risks.

(2) Enhance the marketability of environmentally

impaired property by amending liability standards of

federal and state environmental laws to exempt nonculpable new purchasers from liability; (3) Establish

state and/or federal environmental loan-guarantee

programs; and (4) Replace the current joint and several

liability standard with a proportional liability standard to

ensure that firms pay only their fair share of the cleanup

bill.

Ordering Information

The complete report is available from:

National Technical Information Service

U.S. Department of Commerce

5285 Port Royal Road

Springfield, VA 22161

(703) 487-4650

(703) 487-4639 (TDD)

Order number: PB96-195870

Price codes: A10 (paper); A02 (microfiche)