Relationship Lending and Lines of Credit in Small Firm Finance
Posted: 17 Nov 2009
There are 3 versions of this paper
Relationship Lending and Lines of Credit in Small Firm Finance
Relationship Lending and Lines of Credit in Small Firm Finance
Date Written: 1995
Abstract
Explores the role of bank-borrower relationships in small firm finance. Focus is on the availability and terms of lines of credit approved by banks. Data were obtained from the U.S. National Survey of Small Business Finances conducted in 1988-89. Telephone interviews were conducted with executives from approximately 3,400 firms, of which 863 reported having lines of credit. The variables used can be classified into five categories: line of credit contract characteristics, firm financial characteristics, firm governance characteristics, industry characteristics, and information/relationship characteristics. The analysis of loan rates shows that the relationship between the banker and the borrower impacts the pricing of the loans. These results are consistent with models that hold that there is a negative correlation between loan rates and the length of the relationship between the lender and the borrower. The requirement that a firm pledge collateral is less likely for older firms who have had long relationships with the bank. Overall, the analysis shows that the longer the relationship between the banker and the borrower, the easier the loan terms are for the borrower. These findings support the proposition that bank-borrower relationships provide important information about borrower quality. (SRD)
Keywords: U.S. National Survey of Small Business Finances, Lines of credit, Bank-borrower relations, Interest rates, Bank loans, Credit, Banks, Access to capital, Interest (finance), Collateral, Firm financing
Suggested Citation: Suggested Citation