CREDIT, BANKS AND SMALL BUSINESS¢â‚¬â€œ THE NEW CENTURY - NFIB...

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Transcript of CREDIT, BANKS AND SMALL BUSINESS¢â‚¬â€œ THE NEW CENTURY - NFIB...

  • January 2003

    CREDIT, BANKS AND SMALL BUSINESS–

    THE NEW CENTURY

    CREDIT, BANKS AND SMALL BUSINESS–

    THE NEW CENTURY

    Jonathan A. Scott

    William C. Dunkelberg

    William J. Dennis, Jr.

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  • Jonathan A. Scott, Temple University

    William C. Dunkelberg, Temple University

    William J. Dennis, Jr., NFIB Research Foundation

    CREDIT, BANKS AND SMALL BUSINESS–

    THE NEW CENTURY

    CREDIT, BANKS AND SMALL BUSINESS–

    THE NEW CENTURY

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  • 1201 “F” Street NW Suite 200

    Washington, DC 20004 nfib.com

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  • TABLE OF CONTENTS Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

    List of Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

    Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

    Credit, Banks, and Small Business–The New Century . . . . . . . . . . . . . . . . . . . . . . .5 Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 Highlights of Financial Service Experiences . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 Mergers and Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

    Mergers, Competition and Service Quality . . . . . . . . . . . . . . . . . . . . . . . . .15 Competition and Credit Quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 Sources of Financing for Small Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Types of Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 Credit Card Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27 Trade Credit Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

    Product Use and Service Assessments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 Product Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 Technology and Product/Service Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34 Service and Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

    Credit Availability and Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 Credit Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48 Success in Obtaining Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52 Terms of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 Price of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

    Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62

    Appendix I: Credit, Banks, and Small Business Survey . . . . . . . . . . . . . . . . . . . . . .64

    Appendix II: Total Sample Response Distributions . . . . . . . . . . . . . . . . . . . . . . . . .68

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    FORWARD

    The climate for financing small businesses has changed radically since this series began to document it over two decades ago. Most of the changes have been for the better. Credit availability now is greater; interest rates are lower; new classes of lenders are entering the market; financial service providers are more likely to focus on small business and more intense competition exists for its financial business; and, rel- evant financial services, many of them new, are abundant and their numbers growing. However, all changes have not been favorable. The positives have been accompanied by some negatives. The most notable downside has been the turbulence and instability associated with bank mergers and acquisitions as well as the growing impersonality associat- ed with the greater use of technology in the financial services industry. Nor, have rising fees been popular. Many of these changes resulted from deregulation of financial services beginning in the late 1970s, accelerating into the 1980s, and carrying through to the present. Other changes have resulted from fluctuating economic conditions. It is now difficult to imagine that when NFIB began documenting small business financing conditions the prime interest rate reached 20 percent. It is not important here to sort out the relative contribution of each of these factors to the general improvement in small business financing conditions over the last several years. It is only important to recognize that these changes occurred and that both contributed.

    This edition is the sixth in the Credit, Banks, and Small Business series. The first survey for the series was conducted in 1980, followed by others in 1982, 1984, 1987, 1995, and in the late autumn of 2001. This constitutes the longest time series on small business finance known to the authors, and indeed the only one available except the shorter-running Survey of Small Business Finances produced by the Federal Reserve. The latter dates to 1987. While there is some overlap in content between these two perspectives on small business finance, they are on the whole complementary to one another. NFIB devotes more attention to market conditions such as the impact of mergers and competition, and small-business owner demand/satisfaction with banking services while the Fed collects more detailed information on the use of credit and credit-type products.

    From the beginning, the survey sample for Credit, Banks has been drawn from the NFIB membership. The 2001 version is the same. While the NFIB membership is large and general- ly reflects the broader population, the sample inevitably creates questions about representa- tiveness. The authors discussed weighting the data in response. A decision was made NOT to do so. The rationale for the decision was that the primary interest of the series is in trends (over time). If weighting were important, the revised data would not allow comparisons among

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  • points in time. If it were not important, there would be no need to weight. Thus, the data appearing in this publication are comparable to prior series editions.

    The Credit, Banks micro-data are available for researchers wishing to use them. A set of weights appears in the data set for those more concerned about representativeness and less about change over time. The weights were created by the authors from a three-axis matrix con- sisting of employee size of business (4 classifications), industry (8 major SIC codes), and geo- graphic region (7 regions). The matrix was produced by the Office of Advocacy at the U.S. Small Business Administration using 1997 Census data.

    The NFIB Research Foundation hopes this edition of Credit, Banks, and Small Business will provide greater insight into small-business financing, one of the most important and discussed aspects of small business ownership and operation.

    NFIB Research Foundation January, 2003

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    LIST OF TABLES

    Table 1: Survey Respondents by Selected Demographic Characteristics . . . . . . . . . . . .6

    Table 2: Selected Financial Service Experience — 2001, 1995, and 1987 . . . . . . . . . . .9

    Table 3: Bank Size by Selected Financial Service Experience . . . . . . . . . . . . . . . . . .11

    Table 4: Experience with Bank Mergers and Acquisitions — 2001 and 1995 . . . . . . .13

    Table 5: Change in Competition for Banking Business Over Time . . . . . . . . . . . . . .14

    Table 6: Bank Mergers and Competition — 2001 and 1995 . . . . . . . . . . . . . . . . . .15

    Table 7: Effect of Bank Mergers and Competition on Service Quality . . . . . . . . . . .16

    Table 8: Effect of Bank Mergers and Competition on Fees and Credit Availability . . .16

    Table 9: Competition for Banking Business by Selected Firm Characteristics . . . . . . .18

    Table 10: Distribution of Financing Sources — 2001 and 1995 . . . . . . . . . . . . . . . .20

    Table 11: Sources of Funds for Working Capital by Selected Firm Characteristics . . .20

    Table 12: Sources of Funds for Capital Outlays by Selected Firm Characteristics . . . .22

    Table 13: Sources of Financing by Selected Firm Characteristics . . . . . . . . . . . . . . .24

    Table 14: Financing Patterns and Source Combinations . . . . . . . . . . . . . . . . . . . . .26

    Table 15: Patterns of Credit Card Use . . . . .