CREDIT, BANKS AND SMALL BUSINESS– THE NEW CENTURY - NFIB National Small Business … New...

January 2003

CREDIT, BANKSAND SMALL BUSINESS–

THE NEWCENTURY


THE NEWCENTURY

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


THE NEWCENTURY


THE NEWCENTURY

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1201 “F” Street NWSuite 200

Washington, DC 20004nfib.com


TABLE OF CONTENTS

Foreword . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

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

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

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

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

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

Credit Availability and Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48Credit Search . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48Success in Obtaining Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52Terms of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56Price 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 sincethis series began to document it over two decades ago. Most of thechanges 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 businessand more intense competition exists for its financial business; and, rel-evant financial services, many of them new, are abundant and theirnumbers growing. However, all changes have not been favorable. Thepositives have been accompanied by some negatives. The most notabledownside has been the turbulence and instability associated with bankmergers 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 resultedfrom deregulation of financial services beginning in the late 1970s,accelerating into the 1980s, and carrying through to the present. Otherchanges have resulted from fluctuating economic conditions. It is nowdifficult to imagine that when NFIB began documenting small businessfinancing conditions the prime interest rate reached 20 percent. It isnot important here to sort out the relative contribution of each ofthese factors to the general improvement in small business financingconditions over the last several years. It is only important to recognizethat these changes occurred and that both contributed.

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

From the beginning, the survey sample for Credit, Banks has been drawn from the NFIBmembership. 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 todo 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 dataappearing in this publication are comparable to prior series editions.

The Credit, Banks micro-data are available for researchers wishing to use them. A set ofweights appears in the data set for those more concerned about representativeness and lessabout 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 willprovide greater insight into small-business financing, one of the most important and discussedaspects of small business ownership and operation.

NFIB Research FoundationJanuary, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27

Table 16: Credit Card Use by Selected Firm Characteristics . . . . . . . . . . . . . . . . . .29

Table 17: Patterns of Trade Credit Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31

Table 18: Trade Credit Discounts by Selected Firm Characteristics . . . . . . . . . . . . .32

Table 19: Financial Service Use by Selected Firm Characteristics . . . . . . . . . . . . . . .35

Table 20: Internet Banking by Selected Bank and Firm Characteristics . . . . . . . . . . .38

Table 21: Preferences for and Delivery of Selected

Attributes of Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .41

Table 22: Conditional Top Performance by Selected Market Characteristics . . . . . . . .42

Table 23: Conditional Top Performance by Selected Firm Characteristics . . . . . . . . .45

Table 24: Loan Application Experience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

Table 25: Non-Borrowers by Selected Firm Characteristics . . . . . . . . . . . . . . . . . . .50

Table 26: Loan Application Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51

Table 27: Loan Search Outcome — 2001, 1995, and 1987 . . . . . . . . . . . . . . . . . . .53

Table 28: Loan Turndowns by Selected Application and Firm Characteristics . . . . . .54

Table 29: Loan Size, Type, and Non-Price Terms for New Loans Received . . . . . . . .57

Table 30: Collateral and Other Loan Requirements by Selected Firm Characteristics . . .59

Table 31: Rate Paid on Most Recent Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61

Appendix: Total Sample Response Distributions . . . . . . . . . . . . . . . . . . . . . . . . . .64


EXECUTIVE SUMMARY

• Among America’s small-business owners, banks remained the primary source of external fund-ing for working capital and capital expenditures. However, the importance of banks as a sourceof funds declined modestly between 1995 and 2001 in favor of credit cards and trade credit.

• Sixty (60) percent of small-business owners reported at least one business loan outstanding in2001, while a non mutually-exclusive 20 percent reported personal loans used for businesspurposes. Over 80 percent used credit cards for business purposes with more than half ofthese owners (44 percent) carrying balances each month. Trade credit use was reported by 54percent. Of those taking discounts for early payment, 75 percent said that they take them allof the time or most of the time.

• Almost 90 percent of owners who needed external funds were able to satisfy their borrowingneeds between 1999 and 2001. Those turned down in their most recent loan request tendedto have newer and smaller firms, and firms with very rapid sales growth or recent sales declines.

• For those borrowing, the average interest rate on their loans declined since the last surveyalong with the overall level of market yields. However, fees continued to rise both on a perunit and number of service basis. Over 50 percent of those reporting new loans reported asso-ciated collateral requirements while 26 percent reported fees, 31 reported business checkingrequirements, and 9 percent reported personal checking requirements.

• Despite their success in acquiring credit, most small-business owners were very unhappy withthe quality of bank service, particularly with staff quality and turnover. However, small bankswere the clear favorites and were rated uniformly higher on almost all bank attributes impor-tant to the owner’s banking relationship.

• Owners rated the importance of a series of bank attributes central to their banking relation-ship and followed-up with an assessment of bank performance on these same attributes. Theonly major change in importance ranking between 1995 and 2001 was an increase in the per-centage who rated convenient location very important. The evaluation of bank performanceimproved slightly over the same period for the cost of money and reliability providing credit.Performance fell for the speed of decisions and access to loan officers.

• The number of owners who recently experienced a merger or acquisition of their primaryfinancial institution increased to 35 percent in 2001 from 25 percent in 1995. Mergers/acqui-sitions continued to impose costs on the non-credit aspects of the banking relationship. Thoseexperiencing such consolidations reported a higher incidence of fees and lower service quali-ty. They were also more likely to shop for a new bank. No evidence appeared indicating thatmergers or acquisitions adversely affected credit availability or loan interest rates.

• Competition for small firm banking business continued to increase despite the rise in mergeractivity. Those reporting more competition for their banking business were less likely toreport an increase in fees, more likely to report improved credit availability and rates, andmore likely to rate their bank’s service performance high. However, the benefits of increasedcompetition were not distributed evenly as owners of older, larger firms had better overallexperience than owners of smaller, younger ones.

• Technology use, such as the use of the Internet for transacting bank business (11 percentreported using the Internet for any banking business and only one percent reported using theInternet for loan applications), was very limited and concentrated among owners of newerfirms, presumably younger people who may be more comfortable with this medium.4

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CREDIT, BANKS AND SMALL BUSINESS–THE NEW CENTURY

Much has changed since the 1995 edition of Credit, Banks and SmallBusiness. The robust economic expansion continued for six more yearsresulting in “Credit Availability and Interest Rates” falling to its historiclow as small business’s single most important problem in NFIB month-ly surveys (Small Business Economic Trends). Even with the Fed tight-ening in 2000, small-business owners reported few problems obtainingcredit. Following market yields since 1995, the cost of credit for smallbusiness also declined. In 2002, the lowest nominal rates for short-term credit in the history of Small Business Economic Trends werereported. Since 1994, the aggressive marketing of credit cards has cre-ated a new credit source for small firms as well as adding new financialservices such as record keeping, expense control, and payment consol-idation. Consolidation of the banking system has continued as well.Between December 1995 and December 2001 (the most recent dataavailable from the FDIC), the number of banks fell by 19 percent to8,080 and the average bank asset size increased 113 percent (from$382 million to $813 million). However, new community bank char-ters averaged over 200 per year during the same period. New Internetbanking opportunities have emerged as well, making it possible to obtainbanking services on-line and apply for loans from distant lenders.

This report presents the basic findings from the 2001 edition of Credit, Banks and SmallBusiness with a focus on four issues. First, the effect of the continuing consolidation in thebanking industry on small firms is analyzed, examining how consolidation has affected competi-tion, the cost of services, and credit availability. Next, the sources of financing used by smallbusiness owners are examined with a detailed look at the role of credit cards as a source offinancing operations and expansion. Third, the strength of banking relationships is explored byreviewing the services used and ratings of bank performance using characteristics important tosmall-business owners, with an emphasis on how bank size and market competition affects theseresults. Finally, the availability, terms, and price of new credit extended are examined, againwith an emphasis on differences by firm characteristics, bank size and merger experiences. Thesurvey posed several questions about the use of new technologies such as the Internet for con-ducting bank business and these findings are highlighted in each section.

METHODOLOGYThe NFIB Research Foundation conducted the survey on which this report is based in the fallof 2001. The survey is essentially a repetition of similar studies undertaken in 1980, 1982,1984, 1987, and 1995. Questionnaires were mailed to 12,514 members of the National Feder-ation of Independent Business (NFIB) and responses were received from 2,223, a response rate 5

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ryof 18 percent. Table 1 provides the distribution of respondents by various characteristics. Themedian years in business were 17; median sales were $600,000; and, median total employmentwas 6. The mean values were 19, $2.7 million, and 17 respectively. Males owned sixty-five (65)percent of the firms, females owned 12 percent, and 19 percent were equally owned. About 20percent of the respondents were located in the Northeast, 22 percent in the Midwest, 33 per-cent in the South, and 27 percent in the West. Sixty-two (62) percent were located in urbanmarkets (Metropolitan Statistical Areas) as defined by the Bureau of the Census.

TABLE 1SURVEY RESPONDENTS BY SELECTED DEMOGRAPHIC CHARACTERISTICS

Percent ofCharacteristic Respondents

Form of Business Proprietorship 26 Partnership 4 Corporation 40 S-Corporation 24 LLC 4 No answer 2

Total 100%

Full-Time Equivalent EmployeesOne 6 2–4 21 5–9 27 10–19 20 20–49 14 50–99 5 100 or more 3 No answer 5

Total 100%

Annual Gross Sales (000s)Under $50 5 $51–$100 6 $101–$200 8 $201–$500 18 $501–$1,500 20 $1,501–$5,000 14 Over $5,000 8 No answer 21

Total 100%


TABLE 1 CONTINUED


Total Asset Value (000s)Under $50 8 $50–$99 9 $100–$199 13 $200–$499 22 $500–$999 16 $1,000–$1,999 10 $2,000–$4,999 8 $5,000 or more 4 No answer 10

Total 100%

Years in Business1–4 11 5–10 1911–15 1516–25 27 26–35 14 Over 35 10 No answer 5

Total 100%

Industry Agriculture 7 Construction 15 Manufacturing/Mining 11 Transportation/Comm. 4 Wholesale 10Retail 20FIRE 6 Services 15 Professional services 7 No answer 4

Total 100%

Urban Location (MSA)Yes 62 No 38 No answer *

Total 100%

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TABLE 1 CONTINUED


RegionNortheast 15

New England (5) Middle Atlantic (10)

Midwest 39 East North Central (25) West North Central (14)

South 24 South Atlantic (11) East South Central (5) West South Central (8)

West 22 Mountain (10) Pacific (12)

No answer *

Total 100%

Principal ownerFemale 12 Male 65 Equal ownership 19 No answer 4

Total 100%

*less than 0.5 percent

NFIB has about one-half million member firms with about 20 percent turnover every year.The membership is representative of every major NAICS (North American Industry Classifica-tion System) category, but tends to be slightly larger in terms of employment per firm and tosomewhat over-represent manufacturing firms and firms in rural areas. The results presentedhere are unweighted because the objective is not to make population estimates per se, but toreport on the representative experience of NFIB members and compare it over time utilizinghistorical survey results when available. NFIB’s membership accounts for roughly 1 of every 12employers in the U.S. Though substantial in its own right, NFIB member experiences haveoften been shown to represent those of non-members as well.

HIGHLIGHTS OF FINANCIAL SERVICE EXPERIENCESThe ability of small-business owners to satisfy their firm’s borrowing needs continued toimprove throughout the late 1990s and into the 21st century, including the period of FederalReserve tightening during the year 2000. Sixty-eight (68) percent of owners reported that theywere able to satisfy their borrowing needs all or most of the time, compared to 55 percent in1995 and 61 percent in 1987 (Table 2). This improved satisfaction was reflected in the turn-down rate for those who recently reported applying for a loan. Eleven (11) percent disclosedthat they were turned down on their most recent loan request compared to around 17 percentin 1995 and 1987.

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Satisfaction with banking services was mixed. Subtracting the percent of owners reportinga rating of “worse” from the percent reporting “better,” lending terms and the number of serv-ices offered showed substantial improvement in comparison to the 1995 and 1987 ratings.However, satisfaction with accessibility of the account manager, capability of the staff, and staffturnover continued to deteriorate. The biggest decrease in satisfaction occurred for staff turnover.As will be shown later in this report, all three are a likely result of merger activity.

Three new dimensions of the banking relationships were added to the 2001 survey for per-formance evaluations: quality of service, credit availability and ease of doing business. Moresmall-business owners reported deterioration in service quality than reported improvement,while credit availability and ease of doing business showed a positive change over the prior threeyears (the evaluation period in the 2001 survey). Overall, the service quality assessments for2001 are not surprising. Impersonal information technology has enabled banks to provide moreservices, though they are not necessarily better services or more favorably received. A low inter-est rate environment brought on by an accommodative Fed policy has helped limit any poten-tial financing crunches. But the constant turnover in employees and lack of accessibility to loanofficers has become a noticeable thorn in banking relationships.

Fees, both in their number and cost per unit, continued to increase, but the rate of increaseappears to have slowed. A net 36 percent (percent increase minus percent decrease) reportedan increase in the number of services with fees. That figure was down from 37 percent in 1995though still higher than the 31 percent in 1987. Thirty-eight (38) percent reported a netincrease in fees per unit of service, down from 43 percent in 1995 and only slightly above the37 percent in 1987. The average rate paid on the most recent fixed rate loan was 8.3% in the2001 survey, continuing the downward trend since 1987 that has followed the overall decline inmarket yields. The average spread among loans pegged to the prime rate fell substantially to1.3% in 2001 from 1.7% in 1995.

TABLE 2SELECTED FINANCIAL SERVICE EXPERIENCE—2001, 1995 AND 1987

Survey Year2001 1995 1987

Satisfy All Borrowing Needs (Last 3 Years)Yes, all the time 48 55 61 Yes, most of the time 20 na naNo, seldom satisfied 8 19 8 Did not borrow 20 24 31 No answer 4 2 *

Total 100% 100% 100%

Last Loan Request Turned Down 11% 16% 17%

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TABLE 2 CONTINUED


Principal Financial Institution Changes (Last 3 Years) (Percent better minus percent worse.)Accessibility of account manager -1 3 4Quality of service -3 na naNumber of services offered 23 8 9Capability of staff -1 1 2Staff turnover -24 -5 -5Lending terms 9 -11 -21Credit availability 9 na naEase of doing financial business 2 na na

Change in Number of ServicesFees Paid On (Last 12 Months)Decreased substantially 1 1 1Decreased slightly 3 3 4Stayed the same 43 46 48Increased slightly 30 30 26Increased substantially 10 11 11Don’t know 6 6 8No answer 7 3 2

Total 100% 100% 100%

Net increase (Percent increaseminus percent decrease) 36 37 31

Change in Fees Per Unit ofService (Last 12 Months)Decreased substantially 1 1 1Decreased slightly 3 3 2Stayed the same 42 38 39Increased slightly 34 37 31Increased substantially 8 9 9Don’t know 11 9 14No answer 1 3 4

Total 100% 100% 100%

Net increase (Percent increaseminus percent decrease) 38 43 37

Average Fixed Rate Paid onMost Recent Loan 8.3% 9.4% 11.2%

Average Spread over PrimeRate on Most Recent Loan 1.3% 1.7% 1.5%

na = not asked*less than 0.5 percent

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The financial service experience of small-business owners continued to vary significantly bybank size in the 2001 survey (Table 3). Although no meaningful differences in turndown ratesappeared between large and small banks, the ability of owners to satisfy their borrowing needsall of the time or most of the time was much higher at 75 percent for small banks (under $100million) versus 64 percent at the mega banks (assets over $20 billion). Entrepreneurs were gen-erally much happier with service levels at small banks, especially accessibility of account man-ager, capability of staff, staff turnover, and ease of doing financial business. Owners doingbusiness at small banks still reported a problem with staff turnover, but not nearly to the degreethat was reported by owners doing business at the largest banks. The change in the number offees and cost per unit also differed by bank size with owners patronizing the smallest banksreporting increases in fees much less frequently than those doing business at the largest banks.

TABLE 3BANK SIZE BY SELECTED FINANCIAL SERVICE EXPERIENCE

Bank Asset Size1

VeryAll Small Midsize Large Large Mega

Satisfy All Borrowing Needs (Last 3 Years)Yes, all the time 48 52 53 49 47 42Yes, most of the time 20 23 16 22 21 22No, seldom satisfied 8 7 9 7 8 8Did not borrow 20 15 19 20 20 24No answer 4 3 3 2 4 4

Total 100% 100% 100% 100% 100% 100%

Last Loan Request Turned Down 11% 10% 7% 10% 13% 10%

Principal Financial InstitutionChanges (Last 3 Years) (Percent better minus percent worse)Accessibility of account manager -1 5 7 1 -6 -8Quality of service -3 2 8 -2 -13 -12Number of services offered 23 22 29 26 19 22Capability of staff -1 6 7 -1 -7 -13Staff turnover -24 -14 -17 -24 -31 -38Lending terms 9 8 9 13 8 6Credit availability 9 6 13 12 6 7Ease of doing financial business 2 5 11 1 -3 -8

Change in Number of Serviceswith Fees (Last 12 Months)Decreased substantially 1 * 1 2 1 *Decreased slightly 3 3 3 3 2 4Stayed the same 43 46 47 43 38 39Increased slightly 30 28 26 39 34 38Increased substantially 10 8 7 12 13 10Don’t know 6 5 7 4 6 6No answer 7 9 9 7 6 3

Total 100% 100% 100% 100% 100% 100%

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TABLE 3 CONTINUED

Bank Asset Size1

VeryAll Small Midsize Large Large Mega

Net increase (percent increaseminus percent decrease) 36 33 29 46 44 44

Change in Fees Per Unit of Service (Last 12 Months)Decreased substantially 1 1 1 * 1 *Decreased slightly 3 3 4 3 3 3Stayed the same 42 45 47 40 35 40Increased slightly 34 33 31 37 38 36Increased substantially 8 6 6 10 12 9Don’t know 11 10 11 9 12 11No answer 1 2 1 1 1 2

Total 100% 100% 100% 100% 100% 100%

Net increase (percent increaseminus percent decrease) 38 35 32 44 46 42

1Bank sizes are: Small (<$100 m), Mid ($100–$525m), Large ($525m–$5b),Very Large ($5–$20b), Mega (>$20 b).*less than 0.5 percent

MERGERS AND COMPETITIONThe number of small-business owners reporting that their principal financial institution wasmerged or acquired in the past four years increased to 35 percent in the 2001 survey from 25percent in the 1995 survey (Table 4). Six (6) percent of owners who did experience a mergerreported a positive experience, the same as in 1995. However, the number reporting minortransition problems increased to 29 percent from 17 percent in 1995, while the number report-ing a negative experience only increased to 21 percent from 18 percent in 1995. The percent-age changing banks as a result of the merger fell from 14 percent to 10 percent with most ofchanges occurring in 1998. Small-business owners must either have had fewer choices for a newbank or more decided to “grin and bear it,” accepting the pace of mergers and avoiding thetransactions costs of moving business (and possibly personal) accounts.

Even though fewer owners changed banks, they continued to shop for a new bank. Thirty-three(33) percent of the owners who experienced a merger reported shopping for a new bank comparedto 27 percent overall in 2001. Still, this percentage is down from 1995 when 41 percent reportinga merger also reported shopping for a new bank compared to 30 percent for all respondents.

At the same time that mergers were increasing, small-business owners continued to reportmore competition among financial institutions for their business (Table 5). Forty-two (42) per-cent reported “much more” or “slightly more” competition for their business in the three-yearperiod prior to the survey compared to 38 percent in 1995, 32 percent in 1987 and only 20percent in 1980. Also worth noting is that nine percent reported ”slightly less” or “much less”competition, up from six percent in 1995. Reports of increased competition were positivelyassociated with the number of banks in the local market. Forty-eight (48) percent of ownersreported much more or slightly more competition where six or more banks are in the local mar-ket compared to about 40 percent where there are fewer than six banks.12

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TABLE 4EXPERIENCE WITH BANK MERGERS AND ACQUISITIONS—2001 AND 1995

Survey Year2001 1995

Principal Financial Institution Merged/Acquired (Last 4 Years)Yes 35 25

2001 (8) 2000 (12) 1999 (9) 1998 (6)

No 61 72 No answer 4 3

Total 100% 100%

Year of Merger/Acquisition Survey Year 2001 2000 1999 1998 2001 1995

Effect of Merger/AcquisitionPositive 4 7 7 5 6 6 No effect 28 27 25 19 25 27 Minor transition problems 24 28 31 34 29 17 Negative 19 20 25 20 21 18 Changed banks 6 9 8 18 10 14 Too soon to judge 14 6 1 1 6 15 No answer 5 3 3 3 3 3

Total 100% 100% 100% 100% 100% 100%

2001 Survey 1995 SurveyExperienced Merge/Acqu. Experienced Merge/Acqu.

Yes No All Firms Yes No All Firms

Actively Shopped for New Financial Institution (Last 3 Years)Yes 33 22 27 41 25 30No 61 71 66 56 71 67No answer 6 7 7 3 5 3

Total 100% 100% 100% 100% 100% 100%

Owners located in urban areas (Metropolitan Statistical Areas or MSA) experienced morecompetition for their business than those in rural areas, but paradoxically also more frequentlyreported less competition. Thus, the effect of more competition is attributable to more factorsthan just population density. Regional variations in reported competition were not strong, withonly owners living in the West less frequently reporting changes in competition for their busi-ness than those elsewhere in the country. 13

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TABLE 5CHANGE IN COMPETITION FOR BANKING BUSINESS OVER TIME

Survey Date2001 1995 1987 1984 1982 1980

Change in Competition (Compared to 3 Years Ago)Much more 12 12 12 12 10 7Slightly more 30 26 20 22 17 13No change 45 52 56 58 65 68Slightly less 5 3 3 5 5 10Much less 4 3 5 3 3 2No answer 4 4 4 (Included in no change)

Total 100% 100% 100% 100% 100% 100%

Much more + slightly more 42 38 32 34 27 20Slightly less + much less 9 6 8 8 8 12Net (percent more minus percent less) 33 32 24 26 19 8

Change in Competition: 2001Much + Slightly +

Slightly More No Change Much Less No Ans. Total

Estimated Number of Banks in the MarketOne 42 46 10 2 100%2–3 39 49 7 5 100%4–5 39 49 10 2 100%6–9 48 40 9 3 100%10+ 49 43 7 1 100%

Urban Location (MSA)Yes 43 43 10 4 100%No 40 49 6 5 100%

RegionNortheast 43 43 10 4 100%Midwest 42 45 8 5 100%South 44 44 9 3 100%West 38 49 8 5 100%

Did mergers compromise the competitive environment for small firms’ banking services?The evidence shows no strong association between competition for small business patronage andmergers (Table 6). This result may be due to the emergence of new community banks seekingsmall firm business after the merger occurred, or the emphasis of many larger banks on grow-ing their small business loan portfolio.

While mergers were more likely to be reported in MSAs (38 percent versus 30 percent inrural areas), the change in competition was not noticeably different between the two locations.

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Regionally, owners in the West were much more likely to report a merger (and, as noted inTable 5, were less likely to report more competition for their business), but it was those in theSouth who most frequently reported less competition for their business after a merger.

TABLE 6BANK MERGERS AND COMPETITION—2001 AND 1995

Reported Merger/Acquisition in Last 4 Years Survey Date MSA–2001 Region–20012001 1995 Yes No N’theast Midwest South West

All Firms 35% 25% 38% 30% 39% 30% 36% 45%

Change in Competition for Your BusinessMuch more + slightly more 36 26 38 33 39 30 36 45No change 33 24 37 28 36 34 30 34Much less + slightly less 49 41 51 44 52 35 67 54No answer 21 19 23 19 13 24 23 20

Net (Percent moreminus percent less) -13 -15 -13 -11 -13 -5 -31 -9

MERGERS, COMPETITION AND SERVICE QUALITYOwners who reported a merger or acquisition were uniformly more dissatisfied with their bank-ing relationships than those not reporting a merger (Table 7). However, those who experiencedat least one still reported a net positive experience for the number of services offered, creditavailability and lending terms. Increased competition had the expected positive effect on serv-ice quality. Small-business owners who indicated slightly more and much more competitionmore frequently reported better service quality (as measured by the percent rating service qual-ity as “better” less the percent rating service quality as “worse”) compared to those who indi-cated slightly less and much less competition.

Staff turnover was a pervasive problem. The net percent reporting better service was negativeregardless of merger status or status of changes in competition. However, staff turnover was lessof a problem when more competition or no merger was reported, that is, turnover was simply lessworse than when small-business owners reported no change or less competition, or a merger.

Owners who reported a merger of their primary financial institution in the three years priorto the survey (Table 8), more often experienced an increase in the number of services with fees(55 percent versus 43 percent for non-mergers) and higher fees per unit of service delivered (52percent versus 37 percent). Turndown rates (the percent turned down on their most recent loanapplication) were virtually the same, 11 percent for those experiencing a merger and 10 percentfor others. However, those experiencing a merger were much less likely to report their creditneeds met all the time (44 percent) compared to those not experiencing a merger (51 percent).

Reported changes in competition for the firm’s financial business were strongly associatedwith the incidence of fees as well (Table 8, right panel). Relatively few small-business ownersreported lower or fewer fees regardless of their merger experience or reported differences incompetition for their financial business. However, 52 percent of those experiencing less com-petition reported an increase in the number of services with fees compared to 42 percent ofthose experiencing more competition. A similar pattern emerged on fees per unit of servicewith 52 percent for those reporting less competition compared to 39 percent for those report-ing more.

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TABLE 7EFFECT OF BANK MERGERS AND COMPETITION ON SERVICE QUALITY

Primary Bank Merged Reported Change in Competitionin Last 4 Years for Banking Business

Yes No More1 No Change Less2

Financial InstitutionCharacteristics (Percent reporting Better minus percent reporting Worse.)Accessibility of

account manager -12 6 4 -1 -9Quality of service -18 5 2 -3 -28Number of services

offered 18 27 30 22 4Capability of staff -12 5 10 0 -20Staff turnover -38 -17 -27 -20 -40Lending terms 1 1 15 7 -8Credit availability 3 13 19 5 -17Ease of doing financial

business -13 10 9 0 -281Includes those reporting Slightly More or Much More.

2Includes those reporting Slightly Less or Much Less.

Sixteen (16) percent of those who said that they experienced less competition indicatedtheir credit needs were seldom satisfied over the three years prior to the survey compared tojust 5 percent who reported more competition for their firm’s business. Turndown rates weremuch lower in markets where small firms reported more competition with only seven percentreporting that they were turned down on their most recent loan request compared to 21 per-cent in markets where less competition was reported. An increase in competition also resultedin owners more frequently reporting that their borrowing needs were met at all times (55 per-cent) versus when less competition was reported (30 percent).

TABLE 8EFFECT OF BANK MERGERS AND COMPETITION ON FEES AND CREDIT AVAILABILITY

Merger/Acquisitionof Primary Bank Change in CompetitionYes No More Unchanged Less

All Firms 35% 61% 42% 33% 9%

Change in Number of Services Fees Paid On (Last 12 Months)Decreased 5 4 4 4 4Stayed the same 36 47 42 46 34Increased 55 43 42 38 52Don’t know; No answer 4 6 12 12 10

Total 100% 100% 100% 100% 100%


TABLE 8 CONTINUED

Merger/Acquisitionof Primary Bank Change in CompetitionYes No More Unchanged Less

Net increased (percentincreased minuspercent decreased) 50 39 38 34 48

Change in Fees Per Unit ofService (Last 12 Months)Decreased 4 4 5 3 3Stayed the same 34 46 40 47 31Increased 52 37 44 39 52Don’t know; No answer 10 13 11 11 14

Total 100% 100% 100% 100% 100%

Net increased (percentincrease minuspercent decreased) 48 33 39 36 49

Last Loan RequestTurned Down 11% 10% 7% 12% 21%

Satisfy All Borrowing Needs (Last 3 Years)Yes, all the time 44 51 55 46 30Yes, most of the time 21 20 22 19 24No, seldom satisfied 9 7 5 8 16Did not borrow 21 19 15 23 23No answer 5 3 3 4 7

Total 100% 100% 100% 100% 100%

COMPETITION AND CREDIT QUALITYReports of increased competition could be a credit quality phenomenon, where higher qualityfirms (larger, older) may be the targets of increased solicitations because they represent a poten-tially better risk-adjusted rate of return to the lender. For example, owners of the largest firmsin both sales and assets and the oldest firms more frequently reported more competition for theirbusiness (Table 9). However, the relationship between size and years in business versus competi-tion was not continuous. Increased competition was more frequently reported by owners of firmswith sales over $1.5 million, assets over $1 million, and over 10 years in business. Below thesepoints no strong association with reports of more competition was present (Table 9).

Improving profitability was modestly associated with more competition for the firm’s busi-ness. Forty (40) percent who saw a decline in profitability reported more competition comparedto 44 percent among those who saw no change in profitability and 45 percent among those withprofit gains of 10 percent or more. Similarly, small-business owners who disclosed no change ora decline in sales experienced less competition for their business while those reporting growth,

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ryregardless of the amount, more frequently reported more competition. Overall, reported increas-es in competition for the firm’s business can be associated with better credit quality at theextreme ends of the credit worthiness distribution, but other factors are at work for firms inthe middle.

TABLE 9COMPETITION FOR BANKING BUSINESS BY SELECTED FIRM CHARACTERISTICS1

Change in CompetitionMore No Change Less Net1 No Ans. Total

All Firms 42 45 9 33 4 100%

Sales (000s)Under $50 38 48 8 30 6 100%$51–$100 30 57 10 20 3 100%$101–$200 35 54 7 28 4 100%$201–$500 40 50 7 33 3 100%$501–$1,500 43 47 8 35 2 100%$1,501–$5,000 48 39 11 37 2 100%Over $5,000 56 28 14 42 2 100%

Sales Growth (Annual avg.–last 3 years)Declined more

than 5 percent 40 43 12 28 5 100%No change 40 50 7 33 3 100%Grew 6–10

percent 47 42 8 39 3 100%Grew 11–20

percent 44 45 8 36 3 100%Grew more than

20 percent 45 44 10 35 1 100%Too new to tell 22 65 10 12 3 100%

Assets (000s)Under $50 35 50 9 26 6 100%$51–$100 33 58 5 28 4 100%$101–$200 41 50 8 33 1 100%$201–$500 42 46 8 34 4 100%$501–$1,000 43 45 9 34 3 100%$1,001–$2,000 48 41 9 39 2 100%$2,001–$5,000 56 29 12 44 3 100%Over $5,000 50 31 17 33 2 100%

Years in Business1–4 36 53 6 30 5 100%5–10 39 50 8 31 3 100%11–15 45 43 9 36 3 100%16–25 45 44 9 36 2 100%26–35 42 42 11 31 5 100%Over 35 44 46 8 36 2 100%


TABLE 9 CONTINUED

Change in CompetitionMore No Change Less Net1 No Ans. Total

Profit Trend (Last 3 Years) Declined more

than 5 percent 39 46 13 26 2 100%Unchanged 42 47 7 35 4 100%Up less than

10 percent 44 45 8 36 3 100%Up more than

10 percent 44 46 8 36 2 100%

1Net percent of more competition minus less competition.

SOURCES OF FINANCING FOR SMALL FIRMSBanks have traditionally been the primary supplier of working capital for small firms, but otherinstitutions have become increasingly active in the small business loan market in the past 10years. For example, during the late 1990s, integrated financial services companies like AmericanExpress aggressively marketed small business services and specialized bank lenders focused onmarketing credit cards. The 1995 and 2001 surveys provide an opportunity to observe thechange in the importance of non-bank sources of funds for working capital and capital invest-ment purposes. Respondents in both surveys reported their two most important funding sources.Table 10 presents a distribution of the percent reporting each source as a first or second choicefor both the 1995 and 2001 survey.

Several important trends are revealed in Table 10. Banks continued to play an importantrole in small firm financing. Thirty (30) percent reported banks as one of two most importantsources, down one percentage point from 1995. Likewise, banks continued to be the mostimportant source of funds for capital expenditures for 34 percent of the owners, again downonly one percentage point from 1995. The change in credit card importance showed the biggestincrease between 1995 and 2001. Fifteen (15) percent of owners reported credit cards as themost important source for working capital in 2001, up from 11 percent in 1995. Likewise forcapital expenditures, 12 percent of the owners reported credit cards as the most importantsource of funds, up from eight percent in 1995.

Trade credit increased in importance for both working capital and capital investment, andfinance companies showed a modest gain. Other loan sources, most prominently family andfriends, were used much less often in the late 1990s than in the early 1990s. The implication isthat owners prefer to go to conventional loan sources for their financing, but will employ lessconventional sources when their options are limited. Overall, the reliance on retained earningsas a major source to fund growth and investment increased from 1995, a result of strengthen-ing balance sheets during the 1990s expansion. Stronger balance sheets probably explain at leastin part, why small business owners reported so little trouble obtaining their needed financingthroughout the 2001 slowdown and into 2002.1

1 Among frequent small-business owner borrowers, the net percent reporting that loans were “harder to get”compared to the prior three months fell to 0 in April 1999 and November, 2002, the lowest readings in thehistory of NFIB’s Small Business Economic Trends survey. The figure stood at -3 percent in the fall of 2001, thetime responses to the Credit, Banks survey were received.

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TABLE 10DISTRIBUTION OF FINANCING SOURCES—2001 AND 1995

Percent of Total Sources Reported1

Working Capital Capital Expenditures2001 1995 2001 1995

Banks 30 31 34 35Credit Cards 15 11 12 8Finance Companies 3 2 7 5Other Loans 4 15 4 14Trade Credit 16 12 10 7Retained Earnings 32 29 33 31

Total1 100% 100% 100% 100%

1Respondents reported the two most important sources.The total adds to the number of sources reported by all reporting them.

Perspective on the relationship between firm characteristics and the most important sourceof working capital appears in Table 11. Larger firms in both assets and sales, the fastest growingfirms, male-owned firms, and older firms, are more likely to depend on banks as a major sourceof funding for working capital needs. Credit card importance is concentrated among owners ofsmaller firms, those with sales under $500,000 and assets under $200,000, female owners, andyounger enterprises (those under 10 years in business), as well as those in the non-professionalservice sector. Finance companies are most likely to be used in the transportation industry andby very fast growing firms. The importance of other loan sources for working capital was con-centrated among the youngest, smallest firms.

Trade credit was more frequently reported as an important source by owners of construc-tion, manufacturing, and wholesale trade firms, and less frequently by owners of FIRE, servic-es, professional, and agriculture firms. However, the importance of trade credit showed nostrong association with sales or years in business. Retained earnings were most often cited as asignificant source of working capital for smaller firms and those in the service sector.

TABLE 11SOURCE OF FUNDS FOR WORKING CAPITAL1 BY SELECTED FIRM CHARACTERISTICS

Bank Credit Finance Trade Other EarningsLoans Cards Co. Credit Loans

All Firms 54% 26% 7% 28% 7% 58%

Sales (000s)

Under $50 46 34 7 30 8 59$51–$100 40 41 8 30 5 57$101–$200 47 34 5 20 10 67$201–$500 52 33 8 24 7 54$501–$1,500 58 24 7 28 10 57$1,501–$5,000 61 17 8 35 8 54Over $5,000 73 13 5 33 4 53

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Perspective on the relationship between firm characteristics and the most important sourceof working capital appears in Table 11. Larger firms in both assets and sales, the fastest grow-ing firms, male-owned firms, and older firms, are more likely to depend on banks as a majorsource of funding for working capital needs. Credit card importance is concentrated amongowners of smaller firms, those with sales under $500,000 and assets under $200,000, femaleowners, and younger enterprises (those under 10 years in business), as well as those in the non-professional service sector. Finance companies are most likely to be used in the transportationindustry and by very fast growing firms. The importance of other loan sources for working cap-ital was concentrated among the youngest, smallest firms.


TABLE 11 CONTINUED



than 5 percent 56 25 7 28 10 54No change 53 25 6 29 7 57Grew 6–10 percent 53 26 6 27 6 62Grew 11–20 percent 54 33 6 30 7 56Grew more than

20 percent 60 22 10 29 9 53Too new to tell 53 43 9 19 15 57

Assets (000s)Under $50 29 45 4 22 11 67$51–$100 47 38 7 22 6 62$101–$200 44 35 6 27 10 57$201–$500 55 26 7 29 9 56$501–$1,000 61 23 7 34 8 52$1,001–$2,000 63 17 9 29 4 57$2,001–$5,000 67 13 5 29 4 58Over $5,000 73 11 12 26 4 58

Years in Business1–4 49 34 8 21 14 585–10 50 31 7 29 7 5911–15 52 31 8 26 7 5716–25 57 24 6 30 7 5826–35 59 22 5 30 6 56Over 35 63 16 8 27 5 62

Industry Agriculture 67 23 7 25 3 57Construction 57 24 6 38 4 56Manufacturing/

Mining 51 21 7 34 5 61Transportation/

Comm. 58 26 17 23 5 52Wholesale trade 60 13 5 41 6 54Retail trade 51 30 7 29 10 53FIRE 49 32 4 6 10 64Services 46 37 9 22 10 58Professional

services 57 28 2 9 11 70

Gender of OwnerMale 56 24 7 28 7 59Female 41 39 5 26 7 62Both equally 53 29 8 27 9 64

1 Percent of sources cited. Multiple sources result in horizontal totals of more than 100 percent. 21|

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Variations with size and years in business, and funding sources for capital expenditures weresimilar to the pattern for working capital (Table 12). Smaller firms, younger firms, and female-owned firms more frequently used credit cards as one of two most important funding sources.Those owners of older firms reported bank debt and earnings as their first source of funds forcapital expenditures. The fastest growing firms more frequently relied on banks and finance com-panies. As with working capital, strong industry patterns were observed among important sourcesof funds for capital expenditures. Credit cards were more frequently identified for capital expen-ditures by owners of non-professional service firms, while finance companies were more likely tobe a relatively important source for owners of construction, manufacturing and transportationfirms. Earnings were more frequently reported as the most important source for FIRE and pro-fessional firms. Trade credit was more frequently reported for construction and manufacturingfirms. Finally, other loans, credit cards, and finance companies appeared to be the primary back-up for capital expenditures when owners were turned down on their most recent loan.

TABLE 12SOURCE OF FUNDS FOR CAPITAL OUTLAYS1 BY SELECTED FIRM CHARACTERISTICS


All Firms 47% 17% 10% 14% 5% 47%

Sales (000s)Under $50 36 24 9 18 10 44$51–$100 34 25 7 13 5 43$101–$200 32 26 6 11 7 54$201–$500 45 20 9 14 6 40$501–$1,500 49 16 11 13 6 44$1,501–$5,000 58 11 13 17 5 53Over $5,000 61 5 13 9 5 56

Sales growth (Annual avg.–last 3 years)Declined more

than 5 percent 44 17 11 14 6 39No change 44 15 8 16 5 46Grew 6–10 percent 49 16 9 12 4 53Grew 11–20 percent 51 24 9 14 4 50Grew more than

20 percent 55 17 17 16 9 45Too new to tell 42 33 11 4 24 29

Assets (000s)Under $50 24 31 4 8 12 47$51–$100 35 26 5 9 4 45$101–$200 38 24 9 14 6 41$201–$500 48 17 11 16 5 45$501–$1,000 49 17 11 13 5 44$1,001–$2,000 60 8 11 19 6 53$2,001–$5,000 63 4 12 14 3 55Over $5,000 64 6 17 7 5 64

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TABLE 12 CONTINUED


Years in Business1–4 40 25 10 11 11 425–10 43 22 10 14 5 4511–15 48 18 11 12 4 5216–25 51 14 9 16 5 4826–35 50 14 10 13 3 45Over 35 49 10 11 13 4 53

Industry Agriculture 54 11 13 16 7 47Construction 52 18 12 17 4 46Manufacturing/

Mining 55 12 12 16 4 55Transportation/

Comm. 56 9 21 16 5 46Wholesale trade 54 8 5 16 4 45Retail trade 41 20 11 12 5 39FIRE 37 22 5 5 3 57Services 38 26 10 11 7 44Professional

services 51 19 2 11 8 58

Gender of OwnerMale 49 15 10 14 5 49Female 33 27 7 13 8 44Both equally 50 18 11 14 7 43

1Percent of sources cited. Multiple sources result in horizontal totals of more than 100 percent.

REPORTED TYPES OF FINANCINGRespondents reported on the use of four different types of financing sources (Table 13). Sixty(60) percent of small-business owners disclosed one or more business loans outstanding with amedian value of $75,000. Overall, 82 percent reported using credit cards. Of that number, 38percent reported no balances, that is to say, they paid in full the amount borrowed each monthwhile 44 percent carried balances. Trade credit use was reported by 54 percent and personalloans by 20 percent.

Owners of the largest firms, fastest growing firms, male-owned firms, and those in the agri-cultural and transportation industries most frequently reported outstanding business loans, butno strong relationship with years in business was apparent. The pattern of credit card use dif-fered depending on whether there were outstanding balances. Owners using credit cards withno balances tended to be in business longer (over 5 years in business) and located in the FIREindustry. Those who carried balances more frequently owned younger firms (under 10 years inbusiness) and firms in the non-professional services. Although no strong relationship betweencredit card use and firm size (from under $50 thousand to $5 million in assets or sales) wasapparent, those with firms in the largest category (over $5 million in assets and sales) more fre-quently reported outstanding balances on their cards. These larger firms that carry balances tendto be concentrated in the wholesale and transportation industry. This relationship may reflect

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the fewer credit alternatives for firms in these cyclical, highly fragmented industries. Tradecredit use increased with business size and was most frequently employed by those in thewholesale, construction and manufacturing industries, and less frequently by female ownedfirms.2 Finally, personal loans were concentrated among smaller, younger firms, most frequentlyin the non-professional services industry.

TABLE 13SOURCES OF FINANCING BY SELECTED FIRM CHARACTERISTICS

Sources of Financing (Pct. Using Source)Business Credit Card: Credit Card: Trade Personal

Loans No Balances Balances Credit Loans

All Firms 60% 38% 44% 54% 20%

Sales (000s)Under $50 30 34 49 43 21$51–$100 49 29 48 40 24$101–$200 52 36 42 43 26$201–$500 65 40 44 50 22$501–$1,500 68 37 48 57 21$1,501–$5,000 70 37 50 76 16Over $5,000 67 36 55 73 15


than 5 percent 61 35 47 58 26No change 57 40 41 55 16Grew 6–10 percent 61 40 47 54 18Grew 11–20 percent 68 36 54 56 21Grew more than 20 percent 68 39 48 59 24Too new to tell 61 31 47 43 1

Assets (000s)Under $50 32 37 44 35 25$51–$100 50 35 4 46 22$101–$200 56 36 45 50 24$201–$500 66 35 49 54 21$501–$1,000 69 41 44 59 19$1,001–$2,000 66 40 43 63 13$2,001–$5,000 74 41 47 72 18Over $5,000 70 33 56 67 9

2 The lower frequency of female-owned firm use of bank loans and trade credit (and more frequent use of tradecredit) appears to be strongly correlated with years in business and industry. The female-owned firms tend tobe younger (thus higher risk) and more heavily concentrated in the business services industry (less collateral).

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TABLE 13 CONTINUED

Sources of Financing (Pct. Using Source)Business Credit Card: Credit Card: Trade Personal

Loans No Balances Balances Credit Loans

Years in business1–4 58 28 49 53 305–10 64 37 50 52 2311–15 60 39 47 52 2016–25 64 40 45 8 1926–35 57 44 38 54 15Over 35 55 37 37 56 10

IndustryAgriculture 6 40 37 40 14Construction 62 42 42 64 17Manufacturing/Mining 63 33 48 69 18Transportation/Comm. 67 33 48 49 24Wholesale trade 62 32 48 72 16Retail trade 59 36 46 58 22FIRE 45 51 30 13 18Services 57 38 49 48 27Professional services 59 44 45 35 16

Organizational formProprietorship 52 28 43 40 22Partnership 58 33 40 42 19Corporation 64 35 46 62 17Sub-S Corporation 64 35 45 59 21LLC 70 24 56 58 31

Gender of OwnerMale 61 38 45 56 19Female 52 39 47 48 23Both equally 53 37 46 54 20

Small-business owners typically use more than one credit source simultaneously. The dom-inant patterns observed are detailed in Table 14. Only 13 percent of the borrowers had a singlebusiness loan source; just 10 percent reported only trade credit use; six percent depended sole-ly on credit cards, and two percent reported using only personal loans. Overall, 31 percent usedonly one source of credit.

Business loan combinations with other credit sources dominated the multiple source pat-terns (58%). Half the trade credit users that did not have a business loan had no other sourceof credit. Pairing occurred most often with credit card use. Where credit cards were used with-out business loans or trade credit, no other pairing of significance was observed. In these cases,owners are likely relying on credit cards because they cannot access other, more traditional,credit sources.

Trade credit, alone or in combination with another credit source, is almost as frequentlyused as bank loans. And, credit cards account for 25 percent of the credit sources cited.

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TABLE 14FINANCING PATTERNS AND SOURCE COMBINATIONS

Pct. ofNo. of Cases Total

Selected Financing Source CombinationsTotal Business Loan Sources 1330 71

Business loans only 253 13 Business loan/Trade credit 270 14 Business loan/Credit card 156 8 Business loan/Trade credit/Credit card 18 1Business loan/Trade credit/Credit card/Personal loan 139 7 Business loan/Personal loan combinations 174 9

Total Trade Credit Sources 1196 63Trade credit only 185 10 Trade credit/Business loan 270 14 Trade credit/Credit card 133 7 Trade credit/Personal loan 34 2 Trade credit/Credit card/Personal loan 32 2 Trade credit/Credit card/Business loan 338 18 Trade credit/Credit card/Personal loan/Business loan 139 7 Else 65 3

Total Credit Card Sources 982 52 Credit card only 107 6 Credit card/Personal loan 23 1 Credit card/Business loan 156 8 Credit card/Trade credit 133 7 Credit card/Business loan/Trade credit 338 18 Credit card/Business loan/Trade credit/Personal loan 139 7Else 86 5

Total Personal Loan Source 434 21Personal loan only 32 2 Personal loan/Trade credit 34 2 Personal loan/Credit card 23 1 Personal loan/Trade credit/Credit card 32 2 Personal loan/Business loan combinations1 174 9 Else 139 7

Frequency of Sources UsedBank source 1330 34 Trade credit 1196 30 Credit card 982 25 Personal loan 434 11

Total 3942 100%

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TABLE 14 CONTINUED

Pct. ofNo. of Cases Total

Number of Different Sources UsedOne source 577 31Two sources 671 36Three sources 489 26Four sources 139 7

Total 1876 100%

1Includes Business/Personal/Trade credit

CREDIT CARD USEBusiness credit cards are a relatively new financial service product that have experienced sub-stantial growth among small firms. Forty-two (42) percent of small-business owners use creditcards issued to the business and not personally to the owner; 20 percent use personal cards; and19 percent use both (Table 15). However, this distinction may be blurred depending on thelegal form of business organization because proprietorships and partnerships may be using per-sonal cards for the business. Among those providing a response, over half use one card, 30 per-cent two cards, and 18 percent three or more cards.

The average balance outstanding for those carrying balances beyond the monthly billing cyclewas almost $17,000 with a median balance of $4,000. When those accounts that do not revolvebalances are included, the average balance is under $10,000 with a median balance of $1,000.

TABLE 15PATTERNS OF CREDIT CARD USE

Avg. BalancePct. ($000s)

Name on Credit Card AccountYes, in business name 42 8.2Yes, personal credit card 20 8.8 Yes, both 19 12.3No 15 No answer 4

Total 100% 100%

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TABLE 15 CONTINUED

Pct. ExludesPct. Raw No.Ans.

Average Balance on Credit Cards ($000s)0 32 421 12 162–5 15 206–10 7 911–20 4 621–50 4 551 + 2 2No answer 23 —

Total 100% 100%

Average balance (000s) $ 9.8Median balance (000s) $1.0

Number of Different CardsOne 36 52 Two 21 30 Three 8 11 4–5 3 5 6 or more 1 2 No answer 31 —

Total 100% 100%

Median no. of cards 1.0 Average no. of cards 1.6

Credit card use showed some significant patterns by gender of the owner, firm size, salesgrowth, years in business, and industry (Table 16). Larger firms, above $500 thousand in salesand $1 million in assets, male-owned firms, and those firms in the wholesale trade industrymore frequently used business credit cards. Personal cards showed the opposite trend withregard to size of business and gender of ownership. Owners of firms with sales under $200thousand and assets under $100 thousand more frequently reported personal credit card usealong with those in the agriculture, FIRE and non-professional services industries and female-owned firms. Personal card use showed no strong association with years in business. The fastestgrowing firms more frequently reported using both business and personal cards, while less fre-quently reporting using no credit cards.

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TABLE 16CREDIT CARD USE BY SELECTED FIRM CHARACTERISTICS

Yes– Yes– Yes– Business Personal Both No No

Card Card Cards Card Answer Total

All Firms 42 20 19 15 4 100%

Sales (000s)Under $50 34 31 18 17 * 100%$51–$100 32 25 20 21 2 100%$101–$200 32 29 17 20 2 100%$201–$500 43 20 21 14 2 100%$501–$1,500 48 17 21 14 * 100%$1,501–$5,000 54 15 18 13 * 100%Over $5,000 56 15 20 8 1 100%

Sales Growth (Annual avg.–last 3 years)Declined more than

5 percent 42 21 17 18 2 100%No change 41 23 16 18 2 100%Grew 6–10 percent 47 17 21 13 2 100%Grew 11–20 percent 44 18 27 10 1 100%Grew more than

20 percent 42 23 21 13 1 100%Too new to tell 39 27 12 22 * 100%

Assets (000s)Under $50 32 34 16 16 2 100%$51–$100 37 26 21 15 1 100%$101–$200 39 20 22 19 * 100%$201–$500 43 20 21 14 2 100%$501–$1,000 44 20 21 14 1 100%$1,001–$2,000 54 13 16 16 1 100%$2,001–$5,000 52 16 20 10 2 100%Over $5,000 59 16 14 9 2 100%


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TABLE 16 CONTINUED

Yes– Yes– Yes– Business Personal Both No No

Card Card Cards Card Answer Total

Industry Agriculture 31 26 21 17 5 100%Construction 47 16 20 15 2 100%Manufacturing/

Mining 52 14 15 16 3 100%Transportation/

Comm. 38 21 21 18 2 100%Wholesale trade 48 13 17 20 2 100%Retail trade 40 22 20 16 2 100%FIRE 39 26 16 16 3 100%Services 40 29 20 10 1 100%Professional services 41 20 19 8 12 100%

Form of BusinessProprietorship 26 32 21 18 3 100%Partnership 36 19 22 23 * 100%Corporation 52 15 18 13 2 100%S-corporation 47 19 20 13 1 100%LLC 44 17 20 17 2 100%

Gender of OwnerMale 45 19 19 15 2 100%Female 33 29 24 13 1 100%Both equally 42 21 19 16 2 100%


TRADE CREDIT USESmall-business owners who reported trade credit debt outstanding averaged 67 percent of theirpurchases on trade credit (Table 17). Yet, they averaged 25 percent of their purchases with adiscount for early payment. The median values were 80 percent for trade credit outstanding and10 percent for purchases with a discount for early payment. The cause of the difference betweenthe mean and median values can be seen in the distribution of responses: purchases on creditare skewed towards 100 percent, while discounts for early payment are skewed towards 0 per-cent. Of those who take discounts for early payment, 44 percent said that they “always” takediscounts when available with 31 percent saying “sometimes,” 17 percent “rarely,” and 3 per-cent “never.”

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TABLE 17PATTERNS OF TRADE CREDIT USE

PercentPct.Total Purchaseson Trade Credit None 31 –10 911–50 1051–90 1090–99 13100 9No answer 46

Total 100%

Mean (of those using) 66%Median (of those using) 80%

Pct. Purchases WithoutDiscount for Early PaymentNone 111–5 116–10 711–25 626–50 851–100 9No answer 48

Total 100%

Mean (of those reporting) 25%Median (of those reporting) 10%

Frequency of Discounts for Early PaymentAlways Sometimes Rarely Never No answer Total

All 21 16 10 4 49 100%Those reporting discounts 44 31 17 3 5 100%

Forgoing trade credit discounts for early payment is usually expensive and would be avoid-ed unless no cheaper source of financing were available. Owners reporting that they rarely ornever take discounts also more frequently reported being turned down on their last loan appli-cation (Table 18). Thus, trade credit, like personal loans and credit cards, is an important back-stop when bank credit is not available. The frequency of rarely or never reports taking discountswas also higher among owners of the youngest firms (under 5 years in business) and those withdeclining profit growth. Both factors are associated with more risk and potentially a greaterchance of being turned down for a bank loan.

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TABLE 18TRADE CREDIT DISCOUNTS BY SELECTED FIRM CHARACTERISTICS

Frequency of Taking Discounts for Early PaymentAlways Sometimes Rarely Never No Ans. Total

All Firms 44 31 17 3 5 100%

Sales (000s)Under $50 38 41 14 3 4 100%$51–$100 49 31 17 * 3 100%$101–$200 35 43 14 3 5 100%$201–$500 33 41 16 6 4 100%$501–$1,500 36 28 25 4 7 100%$1,501–$5,000 49 30 16 4 1 100%Over $5,000 57 26 12 3 2 100%

Sales Growth (Annual avg.–last 3 years)Declined more than

5 percent 41 28 21 8 2 100%No change 42 33 18 2 5 100%Grew 6–10 percent 47 32 13 3 5 100%Grew 11–20 percent 48 27 19 4 2 100%Grew more than

20 percent 42 30 19 4 5 100%Too new to tell 8 54 38 * * 100%

Assets (000s)Under $50 25 41 19 6 9 100%$51–$100 33 37 23 4 3 100%$101–$200 41 28 19 6 6 100%$201–$500 36 37 18 3 6 100%$501–$1,000 41 34 18 2 5 100%$1,001–$2,000 53 26 17 3 1 100%$2,001–$5,000 55 26 13 5 1 100%Over $5,000 66 24 6 * 4 100%


Profit TrendDeclined 35 35 21 5 4 100%Unchanged 46 31 16 4 3 100%Up <= 10 percent 44 33 17 3 3 100%Up > 10 percent 49 26 14 4 7 100%

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TABLE 18 CONTINUED

Frequency of Taking Discounts for Early PaymentAlways Sometimes Rarely Never No Ans. Total

Industry Agriculture 42 38 13 4 3 100%Construction 43 34 14 3 6 100%Manufacturing/

Mining 36 24 30 10 * 100%Transportation/

Comm. 42 36 19 * 3 100%Wholesale trade 55 25 14 3 3 100%Retail trade 43 36 15 2 4 100%FIRE 10 39 30 10 1 100%Services 44 32 16 1 7 100%Professional services 43 40 13 * 4 100%

Gender of OwnerMale 45 31 17 3 4 100%Female 34 34 21 7 4 100%Both equally 48 29 16 2 5 100%


BANKING PRODUCTS USE AND SERVICE ASSESSMENTS

PRODUCT USEThe 2001 survey for the first time asked small-business owners about their use of both creditand transaction products (Table 19). Not surprisingly, most owners used business checking (over90 percent) followed by credit products such as revolving lines of credit (48 percent), fixedterm financing (43 percent), business credit cards (37 percent), and international trade finance(1 percent). Transaction product use was much less frequent. Lockbox/night deposit was usedby 23 percent, cash management services by 20 percent, bill payment by 11 percent, and receiv-ables collection by only 2 percent of the respondents. The use of both credit and transactionproducts varied with size, years in business, industry and bank size.

Credit product use showed a predictable relationship with firm size as owners of largerfirms, in either sales or assets, more frequently reported their use. Those owners with fastergrowing firms more frequently reported the use of fixed term financing and revolving lines, butnot seasonal borrowing. The relationship between years in business and credit product use wasless clear. Although owners of the youngest firms (under five years in business) least frequent-ly used credit products, the highest percentages of fixed term and revolving lines appearedamong those in business between 11 and 25 years. Owners of ventures over 25 years old mayhave sufficient cash flow or may not be pursuing growth opportunities. Either reason reducesthe need to obtain external financing.

Industry effects were also evident in credit product use. Small-business owners in the agri-culture and wholesale trade industries more frequently used seasonal financing, while those inmanufacturing and transportation were heavier fixed term finance users. Owners in agriculture,construction, manufacturing and wholesale trade more frequently used revolving credit.

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Notable associations appeared between bank size and credit product use. Smaller banks tend-ed to provide seasonal and fixed term financing more frequently while larger banks were morelikely to provide revolving lines of credit. These outcomes were in part due to the association offirm size and industry with bank size. For example, larger firms that are more likely to use revolv-ing lines of credit were more likely to be banking at larger institutions. Seasonal borrowingshowed a strong association with industry, especially agriculture, construction, manufacturing, andwholesale, and these firms tended to more frequently bank at smaller institutions.

Transaction product use also varied in significant ways with several firm characteristics. Busi-ness checking use increased with sales and assets. Lockbox/night depository showed little rela-tionship to most firm characteristics, but was more frequently reported by those in the retailindustry, particularly when using small banks. The need to deposit each day’s sales receipts forretail firms is likely an important consideration. Business credit card use followed the patternsidentified in Table 16 where larger firms more frequently used the product. Cash managementand sweep accounts showed a use pattern similar to business credit cards. Owners of larger firmsat larger banks more frequently used the service. This product tended to be less frequently usedby the newest firms and most frequently by the oldest firms as well as by firms in the manufac-turing, wholesale and FIRE industries. Finally, owners of the youngest, smallest firms that dobusiness at small banks more frequently reported the use of bill payment services.

TECHNOLOGY AND PRODUCT/SERVICE USESince the 1995 survey, small-business owner use of technology for banking services has expand-ed, though probably less than envisioned by many bank marketing departments. Only 11 per-cent used the Internet for any of their banking (Table 20). Small-business owners might beexpected to more frequently use the Internet if they currently do business with a larger bank orare further away from their primary institution. The former is more likely to occur becauselarge banks have more resources to develop web-based applications and the latter because theInternet provides a lower transactions cost medium. However, the relationship between size ofthe current bank and Internet use was weak. Owners doing business at the smallest banks(under $100 million in assets) less frequently reported Internet use compared to those at thelargest banks (over $20 billion), but differences were small. This finding suggests that the costof entry into this dimension of banking is not prohibitive. Many banks can offer their servicesvia the Internet and, on a computer monitor, all banks appear the same size.

The distance between the owner and the bank (as measured by time) might be expected tovary positively with use of the Internet for banking, but it did not. Nor was a noticeable rela-tionship observable between the number of banks used and Internet use. Owners of largerfirms, the youngest firms (perhaps the most technologically accomplished), and those in theFIRE industry where technology is an imperative for doing business, more frequently reportedusing the Internet for some banking services.

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TABLE 19FINANCIAL SERVICE USE BY SELECTED FIRM CHARACTERISTICS

Credit Products Transaction ProductsLockbox/ Business Cash

Fixed Revolv. Int’l Business Night Credit Mgmt/ Bill Rec.Seasonal Term Line Trade1 Checking Depository Card Sweep Payment Collection1

All Firms 23% 43% 48% 1% 91% 23% 37% 20% 11% 2%

Sales (000s)Under $50 22 26 31 1 86 15 33 10 18 2$51–$100 12 35 35 1 87 21 27 7 16 0$101–$200 21 35 39 2 88 26 32 8 13 2$201–$500 22 43 45 1 92 25 34 12 11 3$501–$1,500 25 44 53 1 93 23 36 18 9 2$1,501–$5,000 29 58 63 2 95 19 46 35 10 2Over $5,000 31 58 71 3 94 25 53 52 9 1

Sales Growth(Annual avg.–last 3 years)Declined more than

5 percent 29 42 46 3 92 21 39 20 13 2No change 21 43 46 2 90 23 36 18 10 1 Grew 6–10 percent 24 44 50 1 91 25 41 23 12 3Grew 11–20 percent 25 47 54 0 94 21 40 22 13 3Grew more than 20 percent 27 48 59 2 91 19 31 18 11 3Too new to tell 12 31 27 0 88 29 29 6 16 0

35 | Credit, Banks and Small Business–The New Century



TABLE 19 CONTINUED

Credit Products Transaction ProductsLockbox/ Business Cash

Fixed Revolv. Int’l Business Night Credit Mgmt/ Bill Rec.Seasonal Term Line Trade1 Checking Depository Card Sweep Payment Collection1

Assets (000s)Under $50 8 20 25 0 86 25 27 5 14 1$51–$100 14 33 36 2 90 22 31 9 14 2$101–$200 19 37 39 1 91 24 33 8 11 1$201–$500 26 46 49 1 92 23 38 15 13 3$501–$1,000 27 46 58 2 91 22 39 20 10 3$1,001–$2,000 28 57 60 1 95 21 41 33 9 0$2,001–$5,000 31 56 67 2 92 23 51 41 11 3Over $5,000 35 64 71 1 91 24 52 64 9 5

Years in Business1–4 15 34 38 2 91 26 37 14 15 25–10 20 46 47 1 91 20 38 17 13 211–15 26 45 50 1 94 25 35 20 12 216–25 25 47 54 2 93 21 38 20 11 226–35 26 43 52 1 88 24 35 20 11 3Over 35 26 36 44 1 86 24 42 28 9 1



Industry Agriculture 46 46 53 * 88 25 35 15 12 2Construction 22 46 54 * 92 16 38 18 11 1Manufacturing/Mining 21 54 56 3 93 17 38 29 10 1Transportation/Comm. 24 52 49 1 89 17 35 21 12 5Wholesale trade 30 46 58 4 88 21 41 26 6 3Retail trade 21 35 42 1 89 36 34 18 15 3FIRE 16 34 36 * 88 26 37 26 10 1Services 16 39 41 1 90 22 40 14 11 1Professional services 20 40 46 1 90 15 41 20 10 2

Bank sizeSmall (< $100 m) 27 48 44 2 93 30 33 16 14 2Mid ($100–$525m) 25 48 45 1 91 27 32 14 11 3Large ($525m–$5b) 21 41 48 2 91 21 37 18 12 3Very Large ($5 –$20b) 22 44 55 1 92 21 42 27 11 2Mega (>$20 b) 20 35 54 1 93 15 45 25 8 0

Gender of OwnerMale 24 44 50 1 91 21 39 20 10 2Female 15 31 36 2 89 29 31 17 15 2Both equally 24 45 50 2 92 26 37 20 15 2

1There are too few observations to make any meaningful comparisons across categories.*less than 0.5 percent


TABLE 20INTERNET BANKING BY SELECTED BANK AND FIRM CHARACTERISTICS

Percent.,Any Banking Via Internet

All Firms1 11

Bank SizeSmall (< $100 m) 11Mid ($100–$525m) 9Large ($525m–$5b) 13Very Large ($5 –$20b) 11Mega (>$20 b) 11

Time to Bank<= 5 min 116–10 min 1111–15 min 1216–20 min 1721–30 min 1130+ min 6

Urban Location (MSA)Yes 12No 8

Years in Business1–4 195–10 1011–15 1216–25 1026–35 9Over 35 11

Sales (000s)Under $50 7 $51–$100 8 $101–$200 11$201–$500 11

$501–$1,500 8 $1,501–$5,000 13 Over $5,000 23

Sales Growth (Annual avg.–last 3 years)Declined more than 5 percent 10No change 9Grew 6–10 percent 12Grew 11–20 percent 15Grew more than 20 percent 17Too new to tell 6

183 % reported none and 6% did not answer.

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TABLE 20 CONTINUED

Percent.,Any Banking Via Internet

Assets (000s)Under $50 11$51–$100 10$101–$200 8$201–$500 9 $501–$1,000 9$1,001–$2,000 12$2,001–$5,000 24Over $5,000 22

IndustryAgriculture 10 Construction 13Manufacturing/Mining 13Transportation/Comm. 8Wholesale trade 11 Retail trade 8FIRE 15 Services 12Professional services 11

SERVICE AND RELATIONSHIPSThroughout the history of the Credit Banks and Small Business surveys, respondents have beenasked to rate the importance of a set of characteristics that are central to their relationship withtheir major financial institution, and then to follow-up by assessing the performance of their pri-mary financial institution on each of these same characteristics. The characteristics include loca-tion, providing helpful suggestions, accessibility of the loan officer, the range of services offered,speed of decisions, reliability as source of credit, knowledge of the owner’s business and indus-try, knowledge of the local market, social contact with the loan officer, and the cost of money.Owners rated the importance of each characteristic on a scale of 1 (“Very important”) to 5(“Not important”), and then their primary financial institution’s performance on the same 5-point scale (1=“Good”, 5=“Poor”). For comparative purposes, the importance and performancerankings are presented for the 2001, 1995 and 1987 surveys in Table 21 based on the frequen-cy of top (“1”) ratings assigned to the characteristics in each survey year.3

The only change of significance in the rankings of bank service importance between 1995and 2001 was the increase from 39 percent to 49 percent in the percentage of owners that ratea convenient location as very important. This change may be in response to the loss of banks andbranches as a result of banking consolidation. Fewer locations should be partially offset overtime by gains in the technology of lending and the use of technology to provide more bankproducts and services. And, although the number of independent financial institutions has dra-matically declined, the number of branches available has not. Thus, the degradation in conven-ience of location assessments appears to be a more complex issue than just geography.

3 The 1987 ratings are not perfectly comparable because a 3-point scale was used (“1” = very important, “2”= important, “3” = not important), while a 5 point scale was used in 1995 and 2001 with the same headings(e.g., “1” = very important, “3” = useful, and “5” = not important).

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ryConsolidation of banks and merger activity probably resulted in the decline of two other

performance measures. The top performance ratings for easy access to loan officer fell substan-tially from 45 percent in 1995 to 39 percent in 2001, as did performance evaluations for speedof decision, moving from 32 percent in 1995 to 28 percent in 2001.

Some of the characteristics of the banking relationship are not important to many ownersmaking a poor performance rating less consequential across the population. In the third panel ofTable 21, performance reports are computed only for those who ranked a characteristic as veryimportant (a “1” on the importance question). With this adjustment, conditional top bank per-formance showed a slightly different profile compared to the raw top rating, improving acrosssix characteristics and declining over four from 1995 and improving across four and decliningover six from 1987.4 The only top performance measures showing a consistent pattern ofimprovement over the last 15 years has been the cheapest money available, convenient location,and knows my industry. Over the same period, three top performance measures—knows youand your business, speed of decisions, and access to the loan officer—consistently declined. Theincreasing size of financial institutions appears to be the unifying theme in these trends.

The top performance ratings showed a marked variation by bank market characteristics(Table 22). Mergers and competition had the expected effect on the top performance rankings.Mergers resulted in worse performance and more competition in better performance. For everycharacteristic except convenient location, owners experiencing a merger less frequently reportedtop performance rankings. The effect of more competition is equally clear. The percentage ofowners giving top performance rankings was higher, usually by a large margin, for every one ofthe 11 dimensions of the relationship. The smallest differences were for provides helpful sugges-tions and convenient location. The largest differences, 16 percentage points or more betweenthose reporting less competition for their business and those reporting more, were for reliablesource of credit, knows you and your business, and speed of decisions.

Market size and bank size also showed a strong association with the top performance rat-ings. Owners located in rural (non-MSA) areas reported noticeably higher ratings for all charac-teristics except provides helpful suggestions, convenient location, and offers a wide range ofservices. Small banks performed better on every characteristic compared to their larger coun-terparts except for convenient location. The difference was most pronounced for mega-banks($20 billion or more in assets). Larger banks with extensive branch networks must be offeringbetter physical proximity than smaller banks with limited branches.

Account manager turnover was also strongly related to the performance ratings. This associ-ation highlights the importance of non-quantitative information and the value of the banking rela-tionship. Firms experiencing no change in their account manager (one account manager in the lastthree years) more frequently reported top performance across all characteristics except for con-venient location. Those who experienced three or more account managers less frequently report-ed top performance across every characteristic but one, convenient location. Small-businessowners who reported that they shopped for a new bank less frequently reported good perform-ance for all characteristics. This association between top performance ranking and tendency tolook for a new bank was related to lower turnover in account managers for these owners.

4 Hereafter conditional top performance is referred to as “top performance”.



TABLE 21PREFERENCES FOR AND DELIVERY OF SELECTED ATTRIBUTES OF FINANCIAL INSTITUTIONS

Top Importance1 Top Rating 2 Conditional Top Rating 3

2001 1995 1987 2001 1995 1987 2001 1995 1987

Offers cheapest money 48% 49% 49% 15% 13% 16% 13% 12% 11% Knows you and business 64 68 69 36 38 44 32 36 37 Knows your industry 30 32 31 17 16 17 13 12 12 Knows local market 32 34 39 28 28 38 18 18 25 Social contact 17 14 na 18 16 na 11 9 naProvides helpful suggestions 20 24 21 14 13 13 8 9 7 Convenient location 49 39 40 48 48 61 36 30 33 Reliable source of credit 58 57 65 41 39 49 36 33 40 Speed of decisions 48 52 57 28 32 38 22 26 28 Easy access to loan officer 50 52 57 39 45 50 32 34 37 Offers a wide range

of services 26 27 35 27 27 43 16 15 22

1 The percent of respondents who rated the characteristic as “1” in importance.2 The percent of respondents that who the characteristic as “1” in performance.

3 The percent of respondents who rated the characteristic as “1” in importance and “1” in performance.na=not asked


TABLE 22CONDITIONAL TOP PERFORMANCE BY SELECTED MARKET CHARACTERISTICS1

Offers Knows Knows Knows Provides Reliable Easy OffersCheapest You/Your Your Local Social Helpful Convenient Source Speed of Access to Wide RangeMoney Business Industry Market Contact Suggestions Location Credit Decisions Loan Officer of Services

All Firms 13% 32% 13% 18% 11% 8% 36% 36% 22% 32% 16%

Reported Merger/Acq. 9 23 9 13 8 5 35 28 15 25 11

Change in CompetitionMore 14 36 13 20 12 8 35 39 26 37 17No change 13 31 13 18 10 8 37 37 20 29 15Less 8 16 7 9 5 7 33 19 10 18 9

Urban Location (MSA)Yes 10 28 10 16 9 7 35 33 19 29 15No 16 38 17 22 14 9 37 39 27 36 16

Bank sizeSmall (< $100 m) 14 44 18 24 14 9 32 42 28 41 17Mid ($100–$525m) 14 42 16 21 13 10 39 40 27 37 16Large ($525m–$5b) 14 33 12 20 13 6 39 39 23 32 18Very Large ($5 –$20b) 12 27 9 15 16 8 34 31 18 28 15Mega (>$20 b) 7 17 9 10 4 4 36 24 13 19 13




No. of Account ManagersOne 15 40 16 22 14 10 35 41 27 39 18Two 12 29 12 17 10 6 38 36 20 30 15Three or more 9 22 9 12 6 4 34 27 15 21 12

Shopped for a New Bank 10 23 9 12 7 6 25 27 15 24 11

1The table shows the percent who rated importance as “1” and performance as “1.”


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ryPerformance rankings showed some relationship to firm characteristics (Table 23). Owners

of larger, older firms more frequently gave higher top performance ratings for offers cheapestmoney available, knows you and your business, knows local market, reliable source of credit,speed of decisions, and easy access to loan officer. This outcome suggests that less risky firmsrated bank performance higher, a conclusion that is supported by examining the outcome of themost recent loan application. For every characteristic, top ratings were associated with a lowerfrequency of denial on the most recent loan application. However, female-owned businessesreported noticeably higher top ratings compared to male-owned firms for knows you and yourbusiness, offers a wide range of services, and convenient location. Rankings of top performancewere not lower than those for male-owned business for any of the characteristics.

Strong industry effects were also apparent in the top performance ratings. Owners of agri-cultural firms gave the top performance ratings across all characteristics, except provides help-ful suggestions and convenient location. The next highest industry ratings were given bytransportation firm owners who rated banks highest on provides helpful suggestions and con-venient location.


TABLE 23CONDITIONAL TOP PERFORMANCE BY SELECTED FIRM CHARACTERISTICS1


All Firms 13% 32% 13% 18% 11% 8% 36% 36% 22% 32% 16%

Sales (000s)Under $50 6 29 24 17 7 7 35 27 11 25 13$51–$100 17 24 23 16 9 6 43 30 16 29 12$101–$200 9 32 23 17 11 5 40 32 16 23 12$201–$500 11 31 25 17 10 7 36 31 19 29 15$501–$1,500 10 31 25 16 11 7 32 33 22 33 15$1,501–$5,000 15 33 27 17 8 8 26 39 26 37 12Over $5,000 15 33 37 17 9 6 32 44 24 33 12

Sales GrowthDeclined more

than 5 percent 11 30 13 15 11 6 35 34 21 28 12No change 13 33 12 16 10 7 35 37 23 32 16Grew 6–10 percent 13 31 12 20 11 7 38 37 23 33 16Grew 11–20 percent 12 35 12 19 8 9 29 34 18 32 11Grew more

than 20 percent 12 28 12 17 11 8 32 34 19 29 15Too new to tell 14 37 20 22 15 20 50 31 21 29 21




TABLE 23 CONTINUED


Assets (000s)Under $50 12 24 10 17 9 6 41 24 18 22 16$51–$100 10 30 7 15 11 4 42 27 13 25 13$101–$200 9 30 11 19 11 9 35 32 19 30 15$201–$500 11 31 11 17 12 5 37 33 20 30 15$501–$1,000 13 32 12 17 10 8 34 37 24 32 15$1,001–$2,000 18 38 18 20 11 8 32 44 29 40 16$2,001–$5,000 15 35 17 20 9 9 27 41 25 36 13Over $5,000 20 37 17 20 9 8 29 54 27 40 18

Years in Business1–4 11 30 10 19 12 11 36 30 18 25 165–10 10 32 10 19 10 9 37 34 17 31 1711–15 9 30 11 16 10 4 37 33 21 29 1416–25 13 31 12 16 9 6 33 35 21 31 1326–35 16 36 16 20 12 6 36 40 24 34 15Over 35 19 37 20 24 15 11 38 43 30 41 22

Denied on most recentloan application 7 18 5 8 6 6 27 12 9 20 10

1



Industry Agriculture 15 43 27 23 14 10 39 45 25 39 16Construction 11 33 10 19 12 7 28 45 21 31 13Manufacturing/Mining 12 26 11 12 7 7 29 37 19 30 12Transportation/Comm. 16 34 20 24 14 11 45 33 22 35 25Wholesale trade 14 33 12 14 10 6 32 35 22 30 14Retail trade 13 35 11 21 12 7 44 40 22 33 18FIRE 5 33 16 21 8 5 40 35 22 29 13Services 13 27 10 17 8 9 34 33 21 27 16Professional services 13 21 10 19 9 7 33 31 21 32 15

Gender of OwnerMale 12 30 12 18 10 7 33 35 21 32 13Female 16 38 14 21 12 10 45 35 23 30 23Both equally 13 36 13 18 11 9 37 38 23 31 18

1 The table shows the percent who rated importance as “1” and performance as “1.”


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CREDIT AVAILABILITY AND TERMS

CREDIT SEARCHSeventy-seven (77) percent of the small-business owners (excluding the 13 percent who saidthey ”never tried” to get a loan and the 10 percent who did not answer the question) searchedfor a loan at some time in their business history (Table 24). Most (63 percent) of the applicantsapplied for a loan in the 18-month period prior to the survey (2000 and 2001). Almost two-thirds (65 percent) applied in person, but about 25 percent initiated their request over the phone(most likely those with stronger bank relationships) and 6 percent mailed or faxed in an applica-tion. Only 1 percent applied via the Internet. Technology, whether high-tech (e.g., the Internet)or low-tech (e.g., fax), was not an important channel for small firms to apply for loans.

The most frequent loan purpose was for fixed assets financing (40 percent) followed byworking capital needs (35 percent) and loan refinancing (9 percent). The median loan sizerequested was $60,000 and the average size was $240,000. The reason for the large differencebetween the average and median loan size can be seen in the frequency distribution. Thirty (30)percent of the requests were for $25,000 or less and 25 percent for more than $100,000, withnearly 10 percent for $500,000 or more.

TABLE 24LOAN APPLICATION EXPERIENCE

Pct. of ThoseNo. of Cases Raw Pct. Who Tried

Year of Last Attempt2001 749 34 432000 347 16 201999 205 9 121998 91 4 51997 or before 340 15 20Never tried 278 13 —No answer 213 9 —

Total 2223 100% 100%

Application MethodIn person 1134 51 65Phone 414 19 24Mail/fax short form 106 5 6Internet web site 13 1 1No answer 65 3 4Did not apply1 491 21 —

Total 2223 100% 100%


TABLE 24 CONTINUED

Pct. of ThoseNo. of Cases Raw Pct. Who Tried

Loan/Credit Line PurposeWorking capital 603 27 35Fixed assets 688 31 40Refinance/

Pay off existing loan 164 7 9No answer 277 13 16Did not apply1 491 22 —

Total 2223 100% 100%

Loan Size Requested (000s)$1–$10 146 7 12$11–$25 219 10 18$26–$50 227 10 18$51–$100 230 10 19$101–$500 304 14 25Over $500 110 5 8No answer 496 22 —Did not apply 491 22 —

Total 2223 100% 100%

Mean Loan Requested (000s) $240 Median Loan Requested (000s) $60

1Includes those who expressly did not try to obtain a loan and those who did not indicate whether or not they had.

The profile of those owners who reported not trying to get a loan is shown in Table 25. Thelargest (over $5 million in sales) and smallest (under $50 thousand in sales) were less likely toreport not applying for a loan, as were faster growing firms. Female-owned firms, firms doingbusiness in the finance and insurance industry, and stable/declining firms were more likely toreport never trying for a loan.

These owners were also asked to report the reason for not trying to get a loan and couldreport multiple reasons. Of the total giving some reason, 75 percent indicated that they did notneed the funds, while 15 percent reported that they never borrow, and 9 percent that theyexpected to be turned down. The respondents who expected to be turned down more fre-quently owned newer firms or were female owners.

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TABLE 25NON-BORROWERS BY SELECTED FIRM CHARACTERISTICS

No. of Pct Did Cases Not Try

All Firms 278 14

Reason (multiple responses allowed)Didn’t need the funds 382 76Never borrow 76 15Expected turn down 48 9

Total 506 100%

Sales (000s)Under $50 21 10$51–$100 27 13$101–$200 29 14$201–$500 39 19$501–$1,500 49 24$1,501–$5,000 23 11 Over $5,000 16 8

Sales Growth(Annual avg.–last 3 years)Declined more than 5 percent 47 16 No change 93 16Grew 6–10 percent 65 11Grew 11–20 percent 26 11Grew more than 20 percent 21 11Too new to tell 10 23

IndustryAgriculture 16 11Construction 40 13Manufacturing/Mining 21 9Transportation/Comm. 7 9Wholesale trade 21 10Retail trade 65 17FIRE 25 20Services 45 15Professional services 22 17

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TABLE 25 CONTINUED

No. of Pct Did Cases Not Try.

Years in Business1–4 37 135–10 53 1911–15 42 1516–25 62 2226–35 34 12Over 35 37 13

Gender of OwnerMale 183 14Female 47 21Both equally 40 10

Over 70 percent of the applicants went to a bank for their loan, followed by six percent atcredit unions and four percent at finance companies and other financial institutions (Table 26).Eighty-one (81) percent of owners seeking financing reported applying at only one financial insti-tution compared to 75 percent in 1995. For those making only one application, 80 percent con-tacted a bank with the remainder spread over other institutions. When two applications weremade, the bank share increased to 85 percent. Even when three or more applications were made,the bank share remained at 85 percent, while finance companies received 16 percent, 12 percentfor other financial institutions, and 9 percent went to credit unions. Seventeen (17) percent ofthose applying at three or more places applied to private individuals (friends, relatives, other).

TABLE 26LOAN APPLICATION ACTIVITY

No. of Cases Pct. of Total Pct.Who Applied

Place Applied

Bank 1231 56 71Credit Union 63 3 4Finance Company 110 5 6Other Fin. Inst 69 3 4Friend, relatives 42 2 2Other individual 22 1 1Other 32 1 2 No answer 163 7 10Did not apply1 491 22 —

Total 2223 100% 100%

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TABLE 26 CONTINUED

No. Pct.Who Pct.Whoof Cases 2001 Pct. Applied 1995 Pct. Applied

Institutions AppliedOne 1268 57 81 58 75Two 143 6 12 11 15Three 55 3 5 5 6Four or more 60 2 2 3 4 No answer 206 10 — 12 —Did not apply1 491 22 — 11 —

Total 100% 100% 100% 100% 100%

Type of Lender ApproachedFinance Credit Other Fin. Friends, Other

Bank Company Union Institution Relatives Individual Other

Number of Loan Application AttemptsOne 80% 6 4 3 2 1 2Two 85% 13 5 10 6 1 1Three or more 85% 16 9 12 10 7 4

Total Numberof Attempts 1231 110 63 69 42 22 32

1 Includes those who expressly did not try to obtain a loan and those who did not indicate whether or not they had.

SUCCESS IN OBTAINING CREDITMost owners were successful in finding a lender and obtaining credit (Table 27). Banks contin-ued to be the predominant source of funds for 84 percent of the successful firms reporting anidentifiable source, up slightly from 83 percent in 1995 and 76 percent in 1987. Seven percent(114 respondents) of the owners seeking a loan reported that during the past 3 years theirapplication was turned down, possibly after repeated attempts. However, 184 owners reporteda reason for a turndown. Clearly, some owners who were turned down at least once in theirsearch for a loan did not answer the screening question, “Where did you get your last loan?”with the first option being, “Did not get the loan.” The incidence of turndowns was higher at11 percent when measured as the number providing a reason for a refusal than the seven per-cent figure based on those reporting a turndown.

Twenty (20) percent of those who had an application turned down were told the companywas too new and had no track record. Twenty-six (26) percent had too much debt; 13 percenthad, in the view of the lender, poor sales prospects or industry conditions; 9 percent had weakbusiness financials; and, 10 percent had weak personal financials. The distribution of reasonsgiven by lenders for loan refusals varies with economic conditions. Lenders in 1987 were muchmore concerned about a recession (“sales prospects”) than in 1995 as the economy began a 5-year period of above average growth. Twenty-six (26) percent of the refusal reasons were forsales prospects in 1987 compared to nine percent in 2001 and only seven percent in 1995.Leverage was more of a concern in 1987 and in 2001 compared to 1995 (29 percent and 26percent of the reasons for a refusal in 1987 and 2001 compared to 18 percent in 1995).

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TABLE 27LOAN SEARCH OUTCOME—2001, 1995, AND 1987

Loan Source–Pct. of Survey Year

No. of Cases Raw Pct. Those Applying 2001 1995 1987

Turned down 114 5 7

Approved 1618 73 93Bank 1125 51 65 84 83 76Credit Union 33 1 2 2 2 3Finance Company 74 3 4 6 3 0Other Fin. Inst 43 2 2 3 2 4Friend, relatives 21 1 1 2 5 7Other individual 17 1 1 1 2 5Other 26 1 2 2 3 5No source given 279 13 16

Did not apply 491 22 —

Total 2223 100% 100% 100% 100% 100%


No. of Cases Pct. No. of Cases Pct. No. of Cases Pct.

Reason for Turndown

Too new 37 20 134 25 44 18Too much debt 47 26 106 20 74 29Poor sales outlook 17 9 32 6 68 27Poor industry

conditions 7 4 29 5 17 7 Weak personal

credit history 19 10 10 2 na naWeak business

financial condition 16 9 72 13 24 10Other 41 22 153 29 24 9

Total 184 100% 536 100% 251 100%

Total applying 1732 3196 1522Total approved (adjusted)1 1548 2660 1271Turndown rate (%)—(adjusted) 11 17 16

1 Total applying minus the total number reporting a reason for a turndown.

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Turndowns were least frequent for owners making only one application (Table 28). Thosewith one application reported a denial 7 percent of the time, those with three or more applica-tions 41 percent of the time. No consistent relationship existed between turndowns and banksize. Applicants in MSAs and from owners whose legal form of business was a proprietorship,partnership or LLC experienced higher turndown rates, but this relationship is likely due to cor-relation with other risk factors such as years in business or industry.

A clear relationship was evident between the length of time in business and the likelihood ofa refusal. Twenty-two (22) percent of those who owned new firms (under 5 years in business)reported being turned down on the most recent attempt (compared to 11 percent of all firmsoverall). The turndown rate fell with increasing firm age and declined to 7 percent for those withfirms in business 20 years or more. Turndown rates also varied widely by industry. They werelowest for service sector firms with 5 percent for professional service and FIRE and highest forthose in transportation and communication (19 percent). Turndown rates also showed a strongnegative association with firm size (sales, employment, assets) ranging from 16 percent for thosewith firms with under $50,000 in annual sales to 3 percent for those with firms of more than $5million. In general, a higher leverage ratio (debt to equity ratio) and declining sales growth wereassociated with a higher turndown rate. Finally, turndown rates were much higher for femalebusiness owners (17 percent). However, this outcome was due to their firms being smaller, con-centrated in the service industry, and in business fewer years than their male counter-parts. Con-trolling for firm differences erased the male/female turndown rate (not shown).

TABLE 28LOAN TURN DOWNS BY SELECTED APPLICATION AND FIRM CHARACTERISTICS

No. Pct.of Cases Turned Down

All Firms 1732 11

Where AppliedBanks 1258 12Finance Co. 111 15Credit Union 66 8Other Fin. Inst 70 8Other (friend, etc) 96 5

Number of AttemptsOne 1268 7Two 143 35Three or more 115 41

Bank SizeSmall (< $100 m) 319 10Mid ($100–$525m) 319 7Large ($525m–$5b) 275 10Very Large ($5 –$20b) 389 13Mega (>$20 b) 242 10

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TABLE 28 CONTINUED


Form of BusinessProprietorship 427 14Partnership 73 16Corporation 719 10S-Corporation 437 8LLC 61 15

Annual Sales (000s)Under $50 75 16$50–$100 95 16$100–$200 141 14$200–$500 340 12$500–$1,500 374 12$1,500–$5,000 262 9$5,000 or more 154 3


than 5 percent 244 16No change 494 8Grew 6–10 percent 506 9Grew 11–20 percent 221 14Grew more

than 20 percent 167 14Too new to tell 34 29

Total Assets (000s)Under $50 110 21$50–99 151 19$100–199 212 12$200–499 402 12$500–999 305 9$1,000–$1,999 201 4$2,000–$4,999 145 6$5,000 or more 75 1

Liability/Asset RatioNo debt 689 10<20% 454 920%–40% 248 10Over 40% 341 14

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TABLE 28 CONTINUED


Years in Business1–4 181 225–9 247 2510–14 278 1115–19 258 929–24 234 625 or more 485 7

Industry Agriculture 134 6Construction 268 11Manufacturing/Mining 211 10Transportation/Comm. 72 18Wholesale trade 180 6Retail trade 326 14FIRE 99 5Services 264 12Professional services 110 9

Urban Location (MSA)Yes 1049 11No 675 9

Gender of OwnerMale 1173 10Female 178 17Both equally 346 10

TERMS OF CREDITThe average loan size granted was $233,000 and the median size granted was $50,000. Theaverage size received was $5,000 above the average loan size requested, while the median sizereceived was $10,000 below the median loan size requested (Table 29). Forty-five (45) percentof the new loans made were fixed term loans; 27 percent were new or increased credit lines; 26percent were a refinancing or renewal of existing loans; and 2 percent were new business cred-it cards (essentially a line of credit). Loan fees were reported by 26 percent of the borrowers;17 percent indicated origination fees and 3 percent commitment fees for lines of credit. Thir-ty-one (31) percent were required to do their business checking at the lending institution andnine percent were required to do their personal banking at the lender as well. Fifty-two (52)percent of those receiving a new loan were required to post collateral as part of their loan agree-ment. Surprisingly, 21 percent of the owners reported collateral valued at over $1 million. Theaverage collateral value was $667,000 with a median market value of $250,000.

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TABLE 29LOAN SIZE, TYPE, AND NON-PRICE TERMS FOR NEW LOANS RECEIVED

Loan ReceivedNo. ofCases Pct. Of Total

Loan Size (000s)$1–$10 164 7$11–$25 238 11$26–$50 200 9$51–$100 209 9$101–$500 260 12$500 or more 102 5No answer/Turned down 375 17Turned down 184 8Did not apply 491 22

Total 2223 100%

Mean size (000s) $233 Median size (000s) $50

Pct. ReportingNo. of Cases Pct. of Total Loan Type

Most Recent Loan TypeNEW fixed term 632 26 45NEW line of credit 246 10 17INCREASED line

of credit 139 5 10RENEWAL of

existing loan 253 11 18NEW business

credit card 40 1 3REFINANCING of an

existing loan 103 4 7No answer/Turned down 462 21 —Did not apply 491 22 —

Total 2223 100% 100%

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TABLE 29 CONTINUED

No. Pct. Reportingof Cases New Loan

Loan RequirementsPersonal Checking 144 11Business Checking 474 34Collateral 811 57Loan Fees 402 29

Origination Fee (258) (19)Commitment Fee (40) (3)No answer (104) (7)

No. of Cases Pct. of Total Pct. ReportingCollateral Value

Collateral Amount (000s)$1–$20 44 5 6$20–$50 67 8 10$51–$100 65 8 10$101–$249 148 18 22$250–$499 112 14 17$501–$1000 95 12 14Over $1000 142 18 21No answer 138 17 —

Total 811 100% 100%

Mean Collateral Amount (000s) $667Median Collateral Amount (000s) $250

The incidence of collateral by type and fees by firm size and industry classification is shownin Table 30. Business property was most frequently used for collateral (64 percent) followed byinventory (36 percent). Accounts receivable were next most frequently reported (28 percent)along with personal guarantees not tied to non-business real estate (29 percent). Twenty-seven(27) percent used their homes or other personal real estate for collateral while 10 percent pro-vided other personal assets. The use of accounts receivable as collateral rises with firm sales. Incontrast, the use of the owner’s private property generally declines with firm size (sales), whileinventory shows no consistent pattern with firm size. Owners with the most marketable goods,that is to say, those in the wholesale and retail industry, most frequently reported using inven-tory as collateral. Wholesalers also most frequently reported using receivables as collateral.Owners of service firms most often put up their homes as collateral. Those in the FIRE indus-try most often put up other personal real estate.

The percentage of owners reporting collateral requirements rose from 48 percent for thesmallest (sales under $50,000) to 77 percent for those whose firms have $5 million or more insales. The incidence of revenue-generating requirements generally increased with the size of theenterprise. Requirements for business checking at the lending bank rose from 31 percent amongowners of the smallest firms to 47 percent of those among the largest. Personal checking businesswas required for 14 percent of the smallest (under $50,000 in sales) compared to 10 percent ofthe largest firms. The incidence of loan fees showed little relationship to firm size.

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TABLE 30COLLATERAL AND OTHER LOAN REQUIREMENTS BY SELECTED FIRM CHARACTERISTICS

Type of Collateral TakenBusiness Other Personal Other Personal

Inventory Receivables Property Home Real Estate Personal Assets Guarantee

All firms 36% 28% 64% 17% 10% 10% 29%

Annual Sales (000s)Under $50 35 21 66 31 13 14 17$51–$100 32 13 64 19 9 17 21$101–$200 29 15 62 18 6 3 9$201–$500 29 13 64 21 13 10 25$501–$1,500 41 31 64 19 7 10 32$1,501–$5,000 35 35 64 14 12 10 37Over $5,000 52 54 63 7 9 7 40

Industry Agriculture 44 28 71 22 15 6 30Construction 28 30 66 18 11 7 26Manufacturing/Mining 38 38 71 15 8 6 35Transportation/Comm. 11 19 58 14 3 17 33Wholesale trade 58 50 61 11 6 7 37Retail trade 52 16 54 17 9 12 27FIRE 9 5 52 11 23 14 16Services 23 20 64 24 11 15 26Professional services 27 31 71 15 15 14 27



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TABLE 30 CONTINUED

Loan RequirementsCollateral Business Personal Fees

Checking CheckingAll Firms 63% 35% 10% 30%

Annual Sales (000s)Under $50 48 31 14 28$51–$100 64 30 8 30$101–$200 57 34 13 28$201–$500 57 37 13 31$501–$1,500 64 29 10 31$1,501–$5,000 73 40 6 28Over $5,000 77 47 10 33

IndustryAgriculture 64 31 10 35Construction 59 35 11 30Manufacturing/Mining 68 42 10 34Transportation/Comm. 58 30 8 25Wholesale trade 69 40 13 28Retail trade 65 29 7 27FIRE 54 31 14 25Services 60 31 11 32Professional services 57 37 11 27

PRICE OF CREDITThe survey period (1998 through 2001) covered a time frame of remarkable stability in long-term interest rates coupled with dramatic swings in short-term rates. The latter was precipitatedby a major shift in Federal Reserve policy from trying to tame a rapidly growing economy (Fed-eral Funds peaked at 6.5% in early 2000) to preventing a major recession (Federal Funds bot-tomed at 1.75% in late 2001). In spite of this, the average rate of interest on fixed rate loans wasquite stable from year to year. This change in market conditions is reflected in the average ratefor fixed rate loans reported by the date of the loan. The average rate for loans received in 2001was 8.1 percent, higher at 8.4 percent in 2000, and 8.5 percent before 2000. The overall reduc-tion in market interest rates between 1995 and 2001 is also reflected in the reported loan rates(Table 31). The average rate on fixed rate loans in 2001 was 8.3 percent compared to 9.4 per-cent in 1995 and 11.2 percent in 1987.

The distribution of fixed rates paid showed substantial variation in 2001 with 12 percentpaying under 6 percent and 23 percent paying over nine percent. These compare to less than 1percent and 38 percent, respectively, for the same rate intervals in 1995. For owners with loanstied to the prime rate, the average spread was 1.3 percent and the median was 1.0 percent.Only eight percent of those with prime rate loans had a spread over 2.0 percent. The spread isdown considerably from 1995, when the average was 1.7 percent and from 1987 where theaverage spread was 1.5 percent. The decline between 1995 and 2001 may reflect the increasingcompetition for small firm business or the slightly older profile of the respondents to this sur-vey compared to the 1995 survey.

Though not shown in Table 31, there was no meaningful difference in the average fixed rate paidby location, bank size, or the occurrence of a merger. Owners reporting more competition for theirbusiness paid lower rates, but this could be due to the risk characteristics of these firms (see Table 9).


TABLE 31RATE PAID ON MOST RECENT LOAN

Mean MedianNo. of Cases (Pct.) (Pct.)

Interest rateFixed rate 748 8.3 8.0Spread over prime 459 1.3 1.0Spread over LIBOR 20 1.3 1.4 Spread over other 13 * *No answer 345 — —Did not apply/no source 638 — —

Total 2223

Fixed MeanRate (Pct.)

Loan Year2001 8.12000 8.41999 8.51998 or earlier 8.5

No. of Pct. ofCases Total

Fixed rate distribution<= 5.0% 56 75–5.9% 36 56–6.9% 101 147–7.9% 203 278–8.9% 181 249–9.9% 102 1410% or more 69 9

Total 748 100%

*too few cases to calculate

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TABLE 31 CONTINUED

No. of Pct. of Cases Total

Prime rate spread< 0% 9 20.0% 78 170.1–0.50% 47 100.51–1.00% 136 301.00–1.50% 38 81.51–2.00% 114 25>2.00% 37 8

Total 459 100%

CONCLUSIONWhat do the results of the 2001 edition of Credit, Banks and Small Business say about the stateof small business financing and their owners’ relationships with their primary financial institution?

• Small-business owners generally were very successful in obtaining the credit needed to runtheir businesses, benefiting from the overall decline in interest rates and increased competitionfor their banking business since the last survey. Despite their success in acquiring credit, unhap-piness with the quality of service was widespread, especially with staff quality and turnover.And, virtually all firms continued to experience fee increases for banking services used.

• Banks continued to be the dominant supplier of capital to small firms, accounting for 84 per-cent of the identified loan sources. Next largest in market share were finance companiesaccounting for 6 percent. All remaining credit sources accounted for only 10 percent of theloans granted. While banks were the largest supplier, smaller banks were the clear favorite ofsmall firms. Large banks were rated uniformly lower on almost all characteristics important toa small firm’s banking relationship.

• Banking mergers had a mixed effect on small firms. Surprisingly, the occurrence of a mergerdid not have an effect on loan turndown rates, the average rate paid, or the incidence of col-lateral requirements. Although turndown rates were little different, owners of firms whoreported mergers of their primary financial institution were also more likely to report thatthey were less able to meet all of their borrowing needs. Mergers had a strong, negative effecton fees and quality of service, with fees increasing in frequency and amount. Not surprising-ly, small-business owners who did not switch banks after a merger were much more likely toactively shop for a new bank.

• Despite the continued pace of mergers in the banking industry, owners continued to reportmore competition for their business since 1995. This increase in competition resulted in alower incidence of fees for services, improved credit availability, lower loan rates, and higherservice quality, although even more competition did not prevent dissatisfaction with staffturnover.

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• The benefits of more competition were not distributed evenly across all small firms. Not sur-prisingly, larger, older firms had overall better experiences than smaller, younger firms. Female-owned firms were less likely to use bank or trade credit and more likely to rely on creditcards. Yet, female owners did not rank their bank’s performance on characteristics importantto a banking relationship any worse than male-owned firms.

• While banks are the dominant provider of business loans, small firms relied on a variety ofother sources of funds to finance their business. Both trade credit and credit cards were veryimportant sources of financing. Credit cards were used by 84 percent of the respondents with42 percent reporting outstanding balances. For those firms carrying balances, the average bal-ance was almost $17,000, with a median balance of $4,000.

• The use of newer technologies for banking transactions, such as the Internet was very limit-ed, concentrated mostly with newer firms whose owners may be more comfortable with thismedium. Perhaps technology will become a more important part of interacting with banks inthe future, but it is little used as of 2001.

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AP

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APPENDIX IITOTAL SAMPLE RESPONSE DISTRIBUTIONS

1. Over the last three years, was your firm able to satisfy its borrowing needs at alltimes?

Percent No. of Cases

Yes, all the time 48 1061Yes, most of the time 20 449No, seldom satisfied needs 8 167Did not want or need

to borrow 20 438No answer 4 108

Total 100 2223

2. Over the last three years, have you noticed a change in the following characteristicsof the financial institution you deal with most often:

Better No Change Worse NA Total

Accessibility of account manager 13 68 14 5 100%Quality of service 15 61 19 5 100%Number of services offered 31 56 7 6 100% Capability of staff, personnel 14 66 15 5 100% Staff turnover 6 58 30 6 100% Lending terms 21 57 13 9 100% Credit availability 20 60 11 9 100% Ease of doing your

financial business 19 57 18 6 100%

3. During the last 4 years, was your principal financial institution merged or acquiredby another?


Yes, in 2001 8 181 Yes, in 2000 12 264 Yes, in 1999 9 194 Yes, in 1998 6 142 No 61 1355 No answer 4 87

Total 100 2223

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3a. If YES, how did the change affect you?

Positively, a good thing 2 46 No effect 9 198 Minor transition problems 10 228Negatively, a bad thing 8 165Changed financial institutions 3 75Too soon to judge 2 46No answer 66 1,465

Total 100 2223

4. Over the last 12 months, has the number of services on which you pay fees:

Decreased substantially? 1 20Decreased slightly? 3 65 Stayed the same? 43 946 Increased slightly? 30 671 Increased substantially? 10 217Don’t know 6 132 No answer 7 172

Total 100 2223

5. Over the last 12 months, have the fees per unit of service:

Decreased substantially? 1 11 Decreased slightly? 3 68 Stayed the same? 43 924 Increased slightly? 30 746 Increased substantially? 10 179 Don’t know 6 242 No answer 7 53

Total 100 2223

5a. If INCREASED, did the additional cost reflect a comparable increase in the quality of services received?

Yes 2 45 No 35 786 Don’t know 5 109No answer 58 1283

Total 100 2223

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6. Please check each product/service that your business currently or recently (withinthe last 3 years) used at your primary financial institution.

Yes No NA Total

Seasonal financing 23 54 23 100%Night depository/lockbox 23 53 24 100%Business credit card 37 44 19 100%Cash management/

sweep account 20 56 64 100%Bill payment services 11 64 25 100%Fixed term financing

(over 1 year) 43 37 20 100%Revolving line of credit 48 34 18 100%Business checking account 90 2 8 100%Receivables collection service 2 70 28 100%International trade financing 1 70 29 100%

7. Below are listed a number of characteristics that you might look for in a financialinstitution. How important is EACH one to you in conducting your firm’s financialaffairs?

Very NotImportant Useful Important NA Total

Knows you and business 64 16 14 2 1 3 100%Provides helpful suggestions 20 21 35 10 10 4 100%Offers cheapest money

available 48 25 17 3 4 3 100%Convenient location 49 27 18 2 2 2 100%Reliable source of credit 58 23 11 2 2 4 100%Knows your industry 30 21 32 7 6 4 100%Speed of decisions 48 33 13 1 1 4 100%Easy access to loan officer 50 30 12 2 2 4 100%Offers a wide range

of services 26 31 31 5 3 4 100%Knows local market 32 30 25 5 4 4 100%Social contact 17 15 28 16 20 4 100%

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8. How would you rate YOUR PRINCIPAL FINANCIAL INSTITUTION on these samecharacteristics?

Good Acceptable Poor NA Total

Knows you and business 36 21 27 8 5 3 100%Provides helpful suggestions 14 16 33 20 12 5 100%Offers cheapest money

available 15 20 39 14 6 6 100%Convenient location 48 25 19 3 2 3 100%Reliable source of credit 41 21 22 7 4 5 100%Knows your industry 17 17 35 19 8 4 100%Speed of decisions 28 26 27 9 5 5 100%Easy access to loan officer 40 23 22 6 4 5 100%Offers a wide range

of services 27 29 33 6 1 5 100%Knows local market 28 25 31 8 3 5 100%Social contact 18 15 34 14 13 6 100%


9. What is the approximate time it usually takes to go from your place of business toyour financial institution?

5 minutes or less 49 10936–10 minutes 25 56011–15 minutes 12 26716–20 minutes 5 11121–30 minutes 3 7131 minutes or more 2 51No answer 4 70

Total 100 2223

10. We want to analyze bank performance as it related to the size of the bank. If youknow the size of your principal financial institution in terms of assets, please checkthe appropriate category below. If you are not sure or don’t know, please name yourprincipal bank and we will look up the size.

Under $50 million 7 148$50 to $100 million 12 257$100 to $999 million 29 643$1 to $4.9 billion 10 213$5 to $19.9 billion 9 211$20 to $100 billion 13 298$100 billion or more 11 253Don’t use a bank,

use another type 1 27No answer 8 173

Total 100 2223

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11. Have you noticed any change in the competition for your firm’s financial businesscompared to 3 years ago?

Much more competition 12 258Slightly more competition 30 667No change in competition 45 1008Slightly less competition 5 103Much less competition 4 88No answer 4 99

Total 100 2223

12. Within the last 3 years, did you actively shop for a new financial institution?

Yes 27 591No 66 1475No answer 7 157

Total 100 2223

12a. If YES, why? (Check ALL that apply) (Percent of total in question #12 who selected each category)

Turnover in account managers 7 152Needed more credit 6 131Wanted better loan terms 12 257Needed more services

than offered 3 74Lower interest rates 10 220Needed better service 13 298

13. When is the last time you changed principal financial institutions?

Never changed 39 8812001 4 822000 5 1061999 5 1121998 5 201997 or earlier 35 768No answer 7 154

Total 100 2223

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13a. What was the major reason for changing?

Problems with a merger 10 211Turnover in account managers 4 6Inadequate credit line 4 85Loan terms too difficult 3 69Followed account manger

to a new bank 4 84Could not get desired

loan terms/size 6 142Treated me as a stranger 7 153Other 14 302No answer 48 1081

Total 100 2223

13b. At the time you changed, how did the size of your new bank compare to the one you left?

Larger 13 290Smaller 24 525About the same size 13 285No answer 50 1123

Total 100 2223

14. How many account managers have you dealt with at your current principal finan-cial institution in the past 3 years?

None 6 129One 43 967Two 33 735Three 11 239Four or more 4 85No answer 3 68

Total 100 2223

15. Overall, how many BANKS does your firm use?


Total 100 2223

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15a. How many of the banks you use are in your local market?


Total 100 2223

15b. How many NON-BANK financial institutions (finance company, credit union etc.) does your firm use for loans, credit cards, lease financing etc.?


Total 100 2223

15c. How many of these non-bank financial institutions are in your local market?


Total 100 2223

15d. Does your firm do any of its banking over the internet?

Yes 11 244No 83 1849No answer 6 130

Total 100 2223

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16. How many different BANKS (with different names) are you aware of in the marketarea in which your firm does most of its business?

One 9 204Two 7 161Three 7 159Four 9 207Five 13 289Six 11 249Seven 6 120Eight to ten 15 322Eleven or more 6 126No answer 17 386

Total 100 2223

17. In your last fiscal year, what were the TWO most important sources of funds tofinance your WORKING CAPITAL needs?

Bank loans(excluding credit cards) 50 1122

Credit cards 25 547Finance company loans 7 143Other loans (friends etc.) 7 153 Trade credit (from suppliers) 26 573Earnings 54 1202One source only 9 206No answer 22 500

Total 200 4446

18. In your last fiscal year, what were the TWO most important sources of funds tofinance CAPITAL OUTLAYS?

Bank loans(excluding credit cards) 43 965

Credit cards 16 346Finance company loans 9 200Other loans (friends etc.) 5 110Trade credit (from suppliers) 12 275Earnings 43 962One source only 18 409No capital expenditures 19 429No answer 34 750

Total 200 4446

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19. Do you have one or more business loans outstanding (fixed term or line of credit)?

Yes 60 1330No 35 787No answer 5 106

Total 100 2223

19a. If YES, what is the approximate total amount currently owed on these loans? ($000s)

1 –10 9 20611–25 10 22526–50 6 13851–100 3 65101–200 10 234201–500 6 124501–1,000 4 791,001–4,999 4 835,000 or more 1 15No answer 47 1054

Total 100 2223

19b. Have you renegotiated the terms on any of these loans within the last 3 years?

Yes 28 627No 29 633No answer 43 963

Total 100 2223

19c. Have you had a business loan application denied anytime in the past 3 years?

Yes 7 146No 50 1117No answer 43 960

Total 100 2223

19d. How many different lenders do you currently use?

One 31 692Two 16 353Three 5 115Four or more 4 83No answer 44 980

Total 100 2223

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20. Do you use credit cards for business purposes?

Yes, card in business name 43 942Yes, personal card 20 450Both business and

personal card 19 427No 15 332No answer 3 72

Total 100 2223

20a. If YES, what is the approximate total of all outstanding balances owed on thesecards? ($000s)

None 32 7151 or less 12 2571–2.9 6 1413–5.9 9 1996–9.9 4 8010–14.9 4 9415–19.9 2 4020–24.9 2 4925 or more 6 128No answer 23 520

Total 100 2223

20b. How many different business credit cards and accounts do you use?


Total 100 2223

21. Do you have existing accounts payable (not credit card debt) owed to your suppliers?

Yes 54 1196No 40 902No answer 6 125

Total 100 2223

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21a. Estimate the percentage of your firm’s purchases (dollars, not transactions) that are made on credit.

None 3 59Under 10% 3 6510%–19% 6 14020%–29% 2 5530%–39% 1 2540%–49% 1 1850%–59% 4 9660%–69% 1 2670%–79% 4 8580%–89% 5 10390% or more 23 504No answer 47 1047

Total 100 2223

21b. Estimate the percentage of your firm’s purchases (dollars, not transactions) that have discounts for early payment.

None (0%) 11 2495% or less 11 2486%–10% 8 16611%–25% 6 14026%–50% 8 17751%–89% 6 13890% or more 3 68No answer 47 1037

Total 100 2223

21c. How often do you take advantage of discounts for prompt payment when available?

Always 21 471Usually 16 361Rarely 10 211Never 4 87No answer 49 1093

Total 100 2223

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22. What is your estimate of the RATIO of your total business liabilities to your totalbusiness assets?

Zero (no debt, no answer) 44 9881–10% 17 37211–20% 9 20621–30% 8 16631–40% 5 10641–50% 8 16751–74% 7 14475% or higher 3 74

Total 100 2223

23. Do you have any PERSONAL loans (other than a personal credit card) that wereused for business purposes?

Yes 20 434No 75 1678No answer 5 111

Total 100 2223

23a. Is the largest amount of your business’s outstanding financial obligations in:

Leases 8 167Credit cards 9 204Loans 56 1245No answer 27 607

Total 100 2223

24. When was the last time you TRIED to get a loan (fixed term, new or increased lineof credit etc.)?

2001 34 7492000 16 3471999 9 2051998 4 911997 or prior 15 340Never tried to get a loan 12 278No answer 10 213

Total 100 2223

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24a. If you NEVER TRIED TO GET A LOAN, was it because (check all that apply):

You didn’t need the funds 17 382Never borrow 3 76You expected to be

turned down 2 48No answer 78 1717

Total 100 2223

24b. Where did you try to get your most recent loan and how did you apply?

In person 67 1218Phone 25 444Mail/Fax short form application 7 120Internet, web site 1 15

Total 100 1797

Bank 78 1404Credit Union 4 72Finance company 7 129Other financial institution 4 79Friend, relatives 3 53Other private individual 2 24Other 2 36

Total 100 1797

24c. From how many financial institutions did you TRY to get a loan before you were successful or stopped trying (including internet sources but excluding private individuals)?

One 58 1282Two 7 144Three 3 56Four 1 30Five or more 1 30No answer 30 681

Total 100 2223

24d. What was the purpose of the loan or credit line?

Working capital 27 603Fixed assets (building, land,

equipment, vehicles) 31 688Refinance/pay off existing loans 7 164Not applicable 29 638No answer 6 130

Total 100 2223

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24e. What loan amount did you request? ($000s)

1–10 7 14611–25 10 21926–50 10 22751–100 10 230101–500 14 304Over 500 5 110Did not Apply 22 491No answer 22 496

Total 100 2223

24f. Where did you get the loan?

Did not get the loan 5 114Bank 50 1125Credit Union 2 33Finance company 3 74Other financial institution 2 43Friend, relatives 1 21Other private individual 1 17Other 1 26No answer 35 770

Total 100 2223

24g. If turned down, what was the reason given?

Too new, no track record 2 37Too much debt, too little equity 2 47Outlook for sales, slow growth 1 17Poor industry conditions/

prospects 1 7Weak personal credit history 1 19Weak business financial

condition 1 16Other 2 41No answer 90 2039

Total 100 2223

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25. Was your most recent loan:

A NEW fixed term loan 28 632A NEW line of credit 11 246An INCREASED line of credit 6 139A RENEWAL of an existing

loan or line of credit 11 253A NEW business credit card 2 40A REFINANCING of an

existing loan 5 103No answer 37 810

Total 100 2223

26. What was the size of your most recent loan (or line of credit, line increase, or creditcard limit)? ($000s)

1–10 14 30311–25 13 29626–50 7 16151–100 3 62101–200 11 248201–500 4 96501–1,000 3 67Over 1,000 4 80No answer 41 910

Total 100 2223

27. Pay back period (loan maturity)?

No loan, no answer 62 140112 months or less 8 16913–24 months 2 5125–36 months 5 11537–48 months 3 5649–60 months 9 20161–120 months 5 104over 120 months 6 126

Total 100 2223

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28. What was the interest rate?

Under 5% 1 335%–6% 4 787%–9% 21 46110%–14% 5 10515% or more 1 20No answer 1 15

Fixed Rate Loan Total 32 712

Prime(plus) 21 459LIBOR (plus) or other index 1 33

Variable Rate Loan Total 22 492

No answer, no loan 46 1019

Total 100 2223

Converted Interest Rate

Under 5% 2 485%–6% 6 1337%–10% 35 77710%-14% 11 23615% or more 1 29No answer 45 1000

Total 100 2223

29. Were you required to pay a fee for the loan?

Yes 21 463No 42 943No answer 37 817

Total 100 2223

29a. If YES, was there an origination fee?

Yes 14 305No 5 112No answer 81 1806

Total 100 2223

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29b. If YES, was there a commitment fee for the unused portion of the line?

Yes 2 45No 15 336No answer 83 1842

Total 100 2223

30. Was business and/or personal collateral required?

Yes 41 907No 22 483No answer 37 833

Total 100 2223

30a. If YES, check all types of collateral that apply.

Inventory 15 327Accounts receivable 11 254Business property/equipment 26 583Personal residence 7 158Other personal real estate 4 93Other personal assets 4 94Personal guarantee 12 264

30b What was the approximate market value of the collateral? ($000s)

Under 20 3 5920–49 4 9150–74 2 5675–99 2 34100–249 9 203250–499 7 153500–999 5 1121,000 or more 8 170No answer 60 1345

Total 100 2223

31. Was your business required to maintain a checking account or use other financialservices at the lending institution to get the loan?

Yes 24 543No 40 898No answer/Not applicable 35 638

Total 100 2223

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31a. Was your personal banking business required at the lending institution as a requirement of the loan?

Yes 8 171No 56 1240No answer/Not applicable 37 812

Total 100 2223

32. What is your legal form of business organization?

Proprietorship 26 570Partnership 4 97Corporation 40 893Sub-S corporation 24 529Limited liability corporation 4 81No answer 2 53

Total 100 2223

33. During your last fiscal year, what were your gross sales, net of sales taxes and otherexcise taxes? ($000s)

Under 50 5 10551–100 6 136101–200 8 187201–500 18 404501–1,500 20 4491,501–5,000 14 304Over 5000 8 182No answer 21 456

Total 100 2223

34. Which category best describes the average annual change in your gross sales overthe past 3 years?

Declined more than 5 percent 14 322No change 29 637Grew 6–10 percent 27 614Grew 11–20 percent 12 268Grew more than 20 percent 9 197Too new to tell 2 49No answer 6 136

Total 100 2223

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35. What category best describes the trend in profitability for your business over thepast 3 years?

Declined 20 449Basically unchanged 29 643Up less than 10 percent 23 522Up more than 10 percent 21 462No answer 7 147

Total 100 2223

36. Do you rent, own or lease your business assets?

Own Rent/Lease Both NA Total

Buildings 45 33 7 15 100%Equipment 73 2 13 12 100%Vehicles 67 6 11 16 100%


37. What category best describes the total asset value of your firm at the end of yourlast fiscal year? ($000s)

Under 50 8 18050–99 10 214100–199 12 274200–499 22 493500–999 16 3531,000–1,999 11 2332,000–4,999 7 1615,000 or more 4 85No answer 10 230

Total 100 2223

38. How long have you owned this business?

Under 5 years 11 2395–10 14 31511–15 16 35416–25 14 31726–35 13 280Over 35 28 614No answer 4 104

Total 100 2223

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38a. In what year was the business founded?

1995–2001 14 3201990–1994 11 2531980–1989 26 5741970–1979 20 440Prior to 1970 27 590No answer 2 46

Total 100 2223

39. How many employees do you have including yourself?

One 7 1472–4 29 6335–9 25 56110–19 17 37120–49 12 27450–99 4 84100 or more 2 46No answer 4 107

Total 100 2223

40. Is the principal owner of this business:

Male 65 1455Female 12 264Male and Female equally 19 423No answer 4 81

Total 100 2223

Industry Classification

Construction 15 341Manufacturing 11 250Transportation 4 85Agriculture 7 164Wholesale 10 220Retail 20 441FIRE 6 137Services 16 342Professional 7 147No answer 4 96

Total 100 2223

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1201 “F” Street NWSuite 200

Washington, DC 20004nfib.com


CREDIT, BANKS AND SMALL BUSINESS– THE NEW CENTURY - NFIB National Small Business … New...

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