No. 255

April 2005

SMALL BUSINESS

RESEARCH

SUMMARY

Finance Companies and Small Business Borrowers:

Evidence from the 1993 and 1998 Surveys of 

Small Business Finances

by George W. Haynes

2005. [44] pages. Bozeman, MT 59715

under contract no. SBAHQ-03-M0516

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.

Finance companies play an important role in providing short- and medium-term financial capital to small

business borrowers. They are the most important

institutional providers of capital to small businesses

after banks. This study examines whether finance

companies’ importance in providing financial capital

to small business borrowers changed during the

1990s. This is interesting because the 1990s were a

decade of rapid growth in financial markets, including expansion in interstate banking and lending by

both finance companies and commercial banks. This

study uses the most recent data on small business

finances to evaluate the importance of finance companies to small business borrowers in 1993 and

1998; to assess what types of borrowers were attracted to finance companies; and to determine if these

finance company borrowers paid higher loan prices.

Overall Findings

The analysis of the 1998 Survey of Small Business

Finances (SSBF) confirmed the importance of

finance companies as the second most important

institutional supplier of credit to small business borrowers—they remained important providers of credit

for vehicle loans, equipment loans, and lease financing. While on the surface, small business borrowers

were more likely to utilize finance companies for traditional loans in 1998 than 1993, this result held

only for capital leases and mortgage loans, which

were not major sources of financing to small firms.

(Fewer than 3 percent of small business borrowers

held a lease or mortgage loan from a finance company in 1998.) Small businesses’ use of the major products marketed by finance companies—vehicle and

equipment loans—remained important but

unchanged during 1993 and 1998. In addition, this

study suggests that small businesses’ relationships

with finance companies remained virtually

unchanged from 1993 to 1998; finance companies

continued to attract good quality clients with low

credit risk, similar to those who utilized commercial

banks.

Highlights

• Finance companies are the second most important institutional lenders to small businesses, especially for vehicle and equipment loans and capital

leases. The probability of using a finance company

in 1998 was 13.3 percent; finance companies’ share

of the total aggregate value of traditional loans was

12.3 percent in 1998.

• Finance companies are especially important

lenders for vehicle loans, where they supplied roughly 40 percent of all vehicle loans in 1998. In addition, finance companies provided over 20 percent of

all equipment loans and over 18 percent of all capital
leases during this period of time.

• The probability of using a finance company has

remained relatively constant from 1993 to 1998 for

all types of loans except leases and mortgages.

Borrowers were more likely to utilize both finance

company leases and mortgages in 1998 than 1993.

• The share of total aggregate value of traditional

loans held by finance companies has remained relatively constant from 1993 to 1998 for all types of

loans, except leases and mortgages. Borrowers held

higher inflation-adjusted balances for both finance

company leases and mortgages in 1998 than 1993.

• Low-risk borrowers were more likely to be

attracted to finance companies than high-risk ones.

• Finance companies may charge higher interest

rates on lines of credit and asset-backed loans than

commercial banks. However, this result should be

used with caution because it is based on a very small

sample of line of credit and vehicle loans held by

finance companies.

Methodology

This study utilizes the 1993 and 1998 versions of the

Survey of Small Business Finances (SSBF). The

SSBF is the national survey conducted by the

Federal Reserve Board of Governors for information

on small businesses’ use of different financing

sources. The 1993 survey has 4,638 observations

representing nearly 5 million small businesses; the

1998 survey has 3,561 observations representing 5.2

million small businesses.

This study utilizes descriptive statistics and other

linear and non-linear statistics to test its proposed

hypotheses. Descriptive tables summarizing the

probability of using all financial (credit union, savings and loan, commercial bank, finance company,

brokerage, leasing company, and other non-depository institutions) and non-financial (family, other business, government, and other individuals) lenders for

each type of traditional loan (lines of credit, capital

leases, mortgages, vehicle, equipment, and other

loans) and the shares of aggregate value of traditional loans held by financial and non-financial lenders

are reported.

This descriptive analysis is supported by non-linear and linear regression analyses examining changes

in lending patterns from 1993 to 1998, assessing the

types of borrowers attracted to finance companies,

and evaluating the prices charged by finance companies for lines of credit and asset-backed loans. Logit

models are employed to examine changes in the

probability of using a finance company over time;

and to assess the types of borrowers attracted to

finance companies in 1998 only. Tobit models are

used to examine changes in the shares of the value of

traditional loans held by finance companies over

time. An ordinary least squares (linear regression)

model was employed to evaluate prices charged by

finance companies.

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: Pending

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