To better their survival chances, entrepreneurs and owners of small businesses in rural areas must successfully pitch their ventures to "faraway, unknown banking officials" rather than relying on local lenders as in the past, according to a
Increasingly, bank branches are headquartered in distant urban areas - and in some cases, financial "deserts" exist in towns with few or no traditional financial institutions such as banks and credit unions. That means that local lending to individuals based on "relational" banking -- with lenders being aware of borrowers' reputation, credit history and trustworthiness in the community -- has dropped, according to a
Instead, more individuals launching small businesses are relying on relatives, remortgaging their homes and even drawing from their pensions -- all of which are risky approaches, said lead researcher
But for the 30 percent who obtain loans through the traditional lending method, that approach also can be very challenging, according to the research article, "Restructuring of the Financial Industry: The Disappearance of Locally
The research is important because local businesses and entrepreneurs are increasingly vital for rural employment growth, said Carson Mencken, Ph.D., professor of sociology in
Researchers have obtained data on loan application outcomes for all U.S. small business and farm loans for the past decade. Besides quantitative findings, the study included interviews with individuals who had applied to local banks that had been taken over by national banks. Many of those expressed dissatisfaction with high interest rates or, more often, rejection.
Many small businesses - especially fledglings - do not have "hard data" on earnings and credit scores to compete for loans at big, nonlocal banks, researchers noted. Some interviewees reported that even when restructured local banks are familiar with individuals' "soft data" -- such as credit history and reputation -- they are far more interested in lending to companies that will bring in large manufacturing.
More than 30 small business owners in rural
Researchers plan to continue studying to learn whether communities with more local banks show higher approval rates than those with fewer community banks.
*The research was funded by the
Most Popular Stories
- SoCalGas Reaches Record Spend on Diversity Suppliers
- Senate Dems Pull All-Nighter on Global Warming
- Senators Reach Deal on Fannie Mae, Freddie Mac
- GM Recall Poses First Major Test for New CEO
- Deborah Hersman Quits NTSB
- Swedish Journalist Nils Horner Shot Dead in Kabul
- Job Openings Less Than Expected in January
- El Empleo Rebota: La Columna Cohen
- Bob Crow Remembered as Shrewd Champion of Union Workers
- Dianne Feinstein Accuses CIA of Spying on Congress