Iowa State University Department of Economics Prof. Maureen Kilkenny Ms. Antara Jaitly Mr. Vitaly Pecharsky Ms. Rebecca Hooper Geography of Rural Financial Intermediation ISU Statistical Laboratory NCRCRD WFRRD

New & Small Business Credit Questions: 1. “Why can’t our [rural community] young people get loans and start new businesses in town?” 2. “Are non-metro borrowers disadvantaged?”

Characteristics of the businesses in the 1993 National Survey of Small Business Finance (NSSBF) data publicly available since May ,637 businesses in the sample 23% owned by women or 50/50 72% founded by current owner 21% purchased 6% inherited 1% publicly traded

97% have business checking accounts only 30% have business savings accounts –32% used business credit cards –37% used personal credit cards for business expenses –56% have ≤ $10K limits on their cards –58% spent less than $1,000 on credit cards in a typical month –77% say they pay in full each cycle

non-metro businesses have longer relationships with their banks

About 85% of small businesses use a bank within 10 miles

collateral, guarantees, and origination fees are are usually required for any loan

Explaining differences (i nonmetro - i metro ) 19% due to different characteristics of metro/non-metro loans &/or borrowers 81% due to different behavior

non-metro borrowers pay higher rates when 1.there are few other banks in the area 2.loan is smaller 3.sales area is smaller 4.firm is independent 5.business has higher ROE (is riskier)

non-metro businesses face more bank market power 85% of non-metro credit markets are ‘highly concentrated’ 42% metro

things that matter in non-metro credit markets don’t matter in metro: –interest rates are not higher for metro businesses where credit markets are more concentrated –metro businesses with higher ROE do not pay higher rates –firm and loan size are not related to i rate paid –independent/franchises do not pay different rates

Metro borrowers pay lower rates when owners are higher-educated Non-metro borrowers pay lower rates when they are minorities

1.“Why can’t our [rural community] young people get loans and start new businesses in town?” MOST Likely reasons: 1.They need to build up their own equity and collateral 2. Their new business must have adequate cash-flow Not likely reasons: 1.branch banks don’t care 2.urban areas/banks drain the savings/loanable funds out of rural communities

2. “Are non-metro borrowers disadvantaged?” 1.fewer banks competing for borrowers 2.new/young borrowers denied more often? 3.smaller banks  ?  higher costs

95% carry fewer than 5 loans from owner(s) 91% have fewer than 5 general partners 88% have fewer than 5 stockholders 2% have more than 10 stockholders Characteristics of businesses in NSSBF, con’t:

3% sought new equity capital that year; fewer than half (44%) were successful –7% from friends/family –9% from financial institutions –13% went public –32% from venture capital firms –64% from informal investors Characteristics of businesses in NSSBF, con’t: