SMB Lending Affected By Relationships

Good relationships between business owners and financial institutions affect loan approval and in a growing economy they can mean lower rates for small businesses.Every business owner understands the value of relationships to business success. Whether those relationships are with suppliers, customers, or employees, they matter. Good ones help support success. Bad ones can hurt the bottom line. It should come as no surprise then that relationships can determine the success or failure of loan approvals.

According the results of "A Multistage Model of Loans and Role Relationships," a study co-authored by Tansel Yilmazer of the University of Missouri and Sugato Chakravarty of Purdue University, good relationships between financial institutions and business owners can affect a borrowers decision to apply and loan approval, but how those relationships factor into loan rates changes with the economic situation. Business owners who have a good relationship with a lender are more likely to apply for a loan and are more likely to have that loan approved.

"The findings suggest that when in a recession, such as now, when loan rates are already low, good relationships between the business and the financial institution do not really matter," said Yilmazer. "However, when in an economic expansion, positive relationships allow loan officers to lower the loan rate." He added, "Relationships are important for both businesses in need of a loan and financial institutions that are trying to attract less risky businesses."

The study used data from the 1993, 1998 and 2003 Survey of Small Business Finances; in 1993 and 2003 the economy was in recession, in 1998 it was expanding.

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