The Benefits of Lending Relationships: Evidence from Small Business Data

Abstract

Previous studies on the benefits of firm-creditor relationships have focused on whether close ties between firms and their banks help ensure credit for firms, even during difficult financial times. This study considers the strength of firm-creditor relationships and their effects on both the availability and price of credit. Data were used from the National Survey of Small Business Finance collected in 1988 and 1989 by the U.S. Small Business Administration and the Federal Reserve System on 3,404 firms with fewer that 500 employees. Firm borrowing patterns, including number of lenders utilized, size of loans, and loan rates, were examined. Other lender relationship factors were identified, including use of nonloan services with the lending institutions (such as checking and savings accounts), and length of the relationship. Findings show that close relationships between firms and institutional lenders increase the availability and, to a lesser extent, reduce the price of credit to firms. The importance of relationships with lenders is further demonstrated in that borrowing from multiple lenders increases costs and reduces the availability of financing. (SFL)

Keywords: Debt financing, Access to capital, Institutional alliances, Lending policies, Debt capital, Credit, Banking industry