Availability of Financing to Small Firms

Using the Survey of Small Business Finances

by Karlyn Mitchell and Douglas K. Pearce

Raleigh, NC 2004. 68 pp., under contract no. SBAHQ-03-Q-0016

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

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or other agencies of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Purpose

The small business sector is of interest to policymakers not only because of the important role it plays in

the U.S. economy, but also because of the avenue to

advancement small business ownership represents, in

particular for ethnic minorities and women. Critical

to small businesses' success is the availability of

financing for both capital acquisition and working

capital purposes. Much of this financing takes the

form of credit extended by commercial banks and

nonbank lenders. 

This study investigates possible restricted access

to credit for minority- and women-owned businesses

by focusing on two types of credit—“relationship

loans” (lines of credit) and “transaction loans” (commercial mortgages, motor vehicle loans, equipment

loans, capital leases, and other loans)—from two

types of creditors: commercial banks and nonbank

lenders. The disaggregated approach is feasible

because of a rich new data set, the 1998 Survey of

Small Business Finances

Overall Findings

The results imply that minority small business owners face some restrictions in access to credit. These

restrictions do not appear to be uniform across loan

or lender type. 

Highlights

• By disaggregating outstanding loans by loan

type and lender type, the research finds that ethnic

minority firm owners are more likely to have transaction loans from nonbanks and less likely to have

bank loans of any kind.

• Consistent with past studies, researchers found

that African-American and Hispanic firm owners

face significantly greater loan denial probabilities

than white male firm owners on both relationship

bank loans and transaction bank loans. New evidence

in this study hints that discrimination may be specific to particular segments of the loan market rather

than a general problem. 

• Researchers found that lenders do not artificially

restrict the credit-market access of female and Asian

firm owners.

• This study breaks new ground by suggesting that

preferential lending practices characterize the granting of transaction loans to a significantly greater

degree than the granting of relationship loans.

Methodology

The researchers postulated that evidence of preferential lending practices, if any, may be discernible in

the patterns of outstanding loans and of loan application denials; and in the average characteristics of

firm owners whose loan applications are approved.

Econometric models used by previous researchers

were adapted to study patterns in outstanding loans

and loan application denials and to investigate the

possibility of preferential lending practices in the

granting of relationship and transaction loans by

commercial bank and nonbank lenders. The

researchers developed five testable hypotheses for

outstanding loans and four for loan application

denials. 

To test the possibility that preferential lending

may take the form of lenders requiring women and

minority firm owners to meet a higher standard to

May 2005 No. 257
obtain a loan, they developed a testable hypothesis

concerning the average characteristics of white male,

women, and minority firm owners whose loan applications lenders had accepted. 

Data from the 1998 Survey of Small Business

Finances were used. The researchers examined the

raw data on outstanding loans, loan applications, and

loan denials for evidence of preferential lending.

They identified variables to use in estimating the

econometric models and examined the characteristics

of these data. 

They estimated probit models of the probability

that a firm owner has an outstanding loan as well as

models of the probability of having a loan application denied. Because firm owners must apply for

loans before they can be approved or denied, they

also presented loan denial models estimated jointly

with loan application models, so as to reduce the

possibility of “selection bias.” They used both the

probit and jointly estimated loan denial models to

develop predicted loan denial probabilities for firm

owners with given characteristics.

Finally, they used t-tests to compare the average

characteristics of white male and minority firm owners whose loan applications were approved.

The final report was peer reviewed consistent with

the Office of Advocacy’s data quality guidelines.

More information on this process can be obtained by

contacting the director of economic research at advocacy@sba.gov or (202) 205-6533.

Ordering Information

The full text of this report and summaries of other

studies performed under contract to the U.S. Small

Business Administration’s Office of Advocacy are

available at www.sba.gov/advo/research. Copies are

also available from:

National Technical Information Service

U.S. Department of Commerce

5285 Port Royal Road

Springfield, VA 22161

(800) 553-6847 or (703) 605-6000

(703) 487-4639 (TDD)

www.ntis.gov

NTIS order number: PB2005-105510

Pricing information:

Paper copy and CD-ROM, A04 ($31.50)

Microfiche, A01 ($14.00)

CD-ROM, A00 ($18.95)

Electronic download, A00 ($8.95)

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