Relationship Lending and Lines of Credit for Small Business

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Title: Relationship Lending and Lines of Credit for Small Business
Author: Gong, Jie
Advisors: Douglas K. Pearce, Committee Chair
Karlyn Mitchell, Committee Member
Howard Bondell, Committee Member
Abstract: This thesis examines the influences of bank-borrower relationships on the terms for bank lines of credit for small business. I use the Surveys of Small Business Finances data to estimate two models: an OLS Regression explaining the premium over the prime rate and a Logistic Regression for the probability of collateral requirements. I focus on those firms with lines of credit with floating rates from commercial banks and use contract, financial, governance, industry and relationship characteristics as explanatory variables. Dun and Bradstreet (D&B) credit scores, minority status and gender are also added to previous models reported in the literature. My results are: (1) Small firms with longer market experiences will pay lower premium rates over the prime rate and firms with higher risk D&B credit scores will pay higher premiums. These results are both statistically and economically significant. However, the length of bank-borrower relationships does not have a statistically significant effect on the loan rate. Although lines of credit may provide more ‘soft-information’ on borrowers during bank-borrower relationships, banks still put more weight on credit scores and the firms’ age. (2) There is no statistically significant relationship between Relationship Characteristics and the probability of collateral requirements. Banks pay more attention to Financial Characteristics and type of ownership. D&B credit scoring system plays a more important role than bank-borrower relationship status. (3) Minority status and gender do not have impacts on loan rates or the probability of pledging collateral.
Date: 2010-04-12
Degree: MA
Discipline: Economics

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