Relationship And Standardized Lending Practices Work Together To Provide Small Business Access To Credit

June 15, 2007; 05:13 AM
WASHINGTON, D.C. – Relationship lending - with lending decisions based on bank-firm relations - dominates lending between small businesses and their primary bank provider, according to a report issued today by the Office of Advocacy of the U.S. Small Business Administration. Competing sources of bank financing, which are primarily larger institutions, tend to use standardized or transactional techniques, such as credit scoring, when making lending decisions.

“Today’s report adds to a series of banking studies which show that smaller banks can successfully use relationship lending to maintain their market niche,” said Dr. Chad Moutray, Chief Economist for the Office of Advocacy. “At the same time, larger institutions’ use of standardized techniques works to provide additional access to credit. The result is a financial market that tends to efficiently allocate capital to small businesses.”

The study, A Two-Step Analysis of Standardized Versus Relationship Bank Lending to Small Firms, (http://www.sba.gov/advo/research/rs305tot.pdf) written by Dr. Polly Hardee with funding from the Office of Advocacy, notes that “no conclusive evidence exists indicating that one lending technique dominates and improves credit availability.” Moreover, the author concludes that the financial market, “if allowed to function freely, efficiently allocates adequate financing to small firms regardless of the supplier’s lending methodology.”

Regional Advocate Christine Serrano Glassner issued the report during a presentation to the 9th Annual Bronx Bankers Breakfast. Borough President Adolfo Carrion, Jr. and the Business Initiative Corporation of New York hosted the event.

The Office of Advocacy, the “small business watchdog” of the federal government, examines the role and status of small business in the economy and independently represents the views of small business to federal agencies, Congress, and the President. It is the source for small business statistics presented in user-friendly formats, and it funds research into small business issues.

For more information and a complete copy of the report, visit the Office of Advocacy website at www.sba.gov/advo.

The Office of Advocacy of the U.S. Small Business Administration (SBA) is an independent voice for small business within the federal government. The presidentially appointed Chief Counsel for Advocacy advances the views, concerns, interests of small business before Congress, the White House, federal agencies, federal courts, and state policy makers. For more information, visit www.sba.gov/advo, or call (202) 205-6533.