CREDIT, BANKS AND SMALL BUSINESS THE NEW CENTURY January 2003 Jonathan A. Scott William C. Dunkelberg William J. Dennis, Jr.
CREDIT, BANKS AND SMALL BUSINESS THE NEW CENTURY Jonathan A. Scott, Temple University William C. Dunkelberg, Temple University William J. Dennis, Jr., NFIB Research Foundation
1201 F Street NW Suite 200 Washington, DC 20004 nfib.com
TABLE OF CONTENTS Foreword......................................................1 List of Tables...................................................3 Executive Summary...............................................4 Credit, Banks, and Small Business The New Century.......................5 Methodology.................................................5 Highlights of Financial Service Experiences............................8 Mergers and Competition.......................................12 Mergers, Competition and Service Quality.........................15 Competition and Credit Quality.................................17 Sources of Financing for Small Firms.............................19 Types of Financing..........................................23 Credit Card Use...........................................27 Trade Credit Use...........................................30 Product Use and Service Assessments...............................33 Product Use..............................................33 Technology and Product/Service Use..............................34 Service and Relationships......................................39 Credit Availability and Terms.....................................48 Credit Search.............................................48 Success in Obtaining Credit....................................52 Terms of Credit............................................56 Price of Credit.............................................60 Conclusion.................................................62 Appendix I: Credit, Banks, and Small Business Survey......................64 Appendix II: Total Sample Response Distributions.........................68
FORWARD The climate for financing small businesses has changed radically since this series began to document it over two decades ago. Most of the changes have been for the better. Credit availability now is greater; interest rates are lower; new classes of lenders are entering the market; financial service providers are more likely to focus on small business and more intense competition exists for its financial business; and, relevant financial services, many of them new, are abundant and their numbers growing. However, all changes have not been favorable. The positives have been accompanied by some negatives. The most notable downside has been the turbulence and instability associated with bank mergers and acquisitions as well as the growing impersonality associated with the greater use of technology in the financial services industry. Nor, have rising fees been popular. Many of these changes resulted from deregulation of financial services beginning in the late 1970s, accelerating into the 1980s, and carrying through to the present. Other changes have resulted from fluctuating economic conditions. It is now difficult to imagine that when NFIB began documenting small business financing conditions the prime interest rate reached 20 percent. It is not important here to sort out the relative contribution of each of these factors to the general improvement in small business financing conditions over the last several years. It is only important to recognize that these changes occurred and that both contributed. This edition is the sixth in the Credit, Banks, and Small Business series. The first survey for the series was conducted in 1980, followed by others in 1982, 1984, 1987, 1995, and in the late autumn of 2001. This constitutes the longest time series on small business finance known to the authors, and indeed the only one available except the shorter-running Survey of Small Business Finances produced by the Federal Reserve. The latter dates to 1987. While there is some overlap in content between these two perspectives on small business finance, they are on the whole complementary to one another. NFIB devotes more attention to market conditions such as the impact of mergers and competition, and small-business owner demand/satisfaction with banking services while the Fed collects more detailed information on the use of credit and credit-type products. From the beginning, the survey sample for Credit, Banks has been drawn from the NFIB membership. The 2001 version is the same. While the NFIB membership is large and generally reflects the broader population, the sample inevitably creates questions about representativeness. The authors discussed weighting the data in response. A decision was made NOT to do so. The rationale for the decision was that the primary interest of the series is in trends (over time). If weighting were important, the revised data would not allow comparisons among 1 Credit, Banks and Small Business The New Century
points in time. If it were not important, there would be no need to weight. Thus, the data appearing in this publication are comparable to prior series editions. The Credit, Banks micro-data are available for researchers wishing to use them. A set of weights appears in the data set for those more concerned about representativeness and less about change over time. The weights were created by the authors from a three-axis matrix consisting of employee size of business (4 classifications), industry (8 major SIC codes), and geographic region (7 regions). The matrix was produced by the Office of Advocacy at the U.S. Small Business Administration using 1997 Census data. The NFIB Research Foundation hopes this edition of Credit, Banks, and Small Business will provide greater insight into small-business financing, one of the most important and discussed aspects of small business ownership and operation. NFIB Research Foundation January, 2003 2 Credit, Banks and Small Business The New Century
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 3 Credit, Banks and Small Business The New Century
EXECUTIVE SUMMARY Among America s small-business owners, banks remained the primary source of external funding for working capital and capital expenditures. However, the importance of banks as a source of 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 in 2001, while a non mutually-exclusive 20 percent reported personal loans used for business purposes. Over 80 percent used credit cards for business purposes with more than half of these owners (44 percent) carrying balances each month. Trade credit use was reported by 54 percent. Of those taking discounts for early payment, 75 percent said that they take them all of the time or most of the time. Almost 90 percent of owners who needed external funds were able to satisfy their borrowing needs between 1999 and 2001. Those turned down in their most recent loan request tended to 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 survey along with the overall level of market yields. However, fees continued to rise both on a per unit and number of service basis. Over 50 percent of those reporting new loans reported associated collateral requirements while 26 percent reported fees, 31 reported business checking requirements, and 9 percent reported personal checking requirements. Despite their success in acquiring credit, most small-business owners were very unhappy with the quality of bank service, particularly with staff quality and turnover. However, small banks were the clear favorites and were rated uniformly higher on almost all bank attributes important to the owner s banking relationship. Owners rated the importance of a series of bank attributes central to their banking relationship and followed-up with an assessment of bank performance on these same attributes. The only major change in importance ranking between 1995 and 2001 was an increase in the percentage who rated convenient location very important. The evaluation of bank performance improved 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. 4 Credit, Banks and Small Business The New Century The number of owners who recently experienced a merger or acquisition of their primary financial institution increased to 35 percent in 2001 from 25 percent in 1995. Mergers/acquisitions continued to impose costs on the non-credit aspects of the banking relationship. Those experiencing such consolidations reported a higher incidence of fees and lower service quality. They were also more likely to shop for a new bank. No evidence appeared indicating that mergers or acquisitions adversely affected credit availability or loan interest rates. Competition for small firm banking business continued to increase despite the rise in merger activity. Those reporting more competition for their banking business were less likely to report an increase in fees, more likely to report improved credit availability and rates, and more likely to rate their bank s service performance high. However, the benefits of increased competition were not distributed evenly as owners of older, larger firms had better overall experience than owners of smaller, younger ones. Technology use, such as the use of the Internet for transacting bank business (11 percent reported using the Internet for any banking business and only one percent reported using the Internet for loan applications), was very limited and concentrated among owners of newer firms, presumably younger people who may be more comfortable with this medium.
CREDIT, BANKS AND SMALL BUSINESS THE NEW CENTURY Much has changed since the 1995 edition of Credit, Banks and Small Business. The robust economic expansion continued for six more years resulting in Credit Availability and Interest Rates falling to its historic low as small business s single most important problem in NFIB monthly surveys (Small Business Economic Trends). Even with the Fed tightening in 2000, small-business owners reported few problems obtaining credit. Following market yields since 1995, the cost of credit for small business also declined. In 2002, the lowest nominal rates for shortterm credit in the history of Small Business Economic Trends were reported. Since 1994, the aggressive marketing of credit cards has created a new credit source for small firms as well as adding new financial services such as record keeping, expense control, and payment consolidation. Consolidation of the banking system has continued as well. Between December 1995 and December 2001 (the most recent data available from the FDIC), the number of banks fell by 19 percent to 8,080 and the average bank asset size increased 113 percent (from $382 million to $813 million). However, new community bank charters averaged over 200 per year during the same period. New Internet banking opportunities have emerged as well, making it possible to obtain banking services on-line and apply for loans from distant lenders. This report presents the basic findings from the 2001 edition of Credit, Banks and Small Business with a focus on four issues. First, the effect of the continuing consolidation in the banking industry on small firms is analyzed, examining how consolidation has affected competition, the cost of services, and credit availability. Next, the sources of financing used by small business owners are examined with a detailed look at the role of credit cards as a source of financing operations and expansion. Third, the strength of banking relationships is explored by reviewing the services used and ratings of bank performance using characteristics important to small-business owners, with an emphasis on how bank size and market competition affects these results. Finally, the availability, terms, and price of new credit extended are examined, again with an emphasis on differences by firm characteristics, bank size and merger experiences. The survey posed several questions about the use of new technologies such as the Internet for conducting bank business and these findings are highlighted in each section. METHODOLOGY The NFIB Research Foundation conducted the survey on which this report is based in the fall of 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 Federation of Independent Business (NFIB) and responses were received from 2,223, a response rate 5 Credit, Banks and Small Business The New Century
of 18 percent. Table 1 provides the distribution of respondents by various characteristics. The median years in business were 17; median sales were $600,000; and, median total employment was 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 20 percent of the respondents were located in the Northeast, 22 percent in the Midwest, 33 percent in the South, and 27 percent in the West. Sixty-two (62) percent were located in urban markets (Metropolitan Statistical Areas) as defined by the Bureau of the Census. TABLE 1 SURVEY RESPONDENTS BY SELECTED DEMOGRAPHIC CHARACTERISTICS Characteristic Percent of Respondents Form of Business Proprietorship 26 Partnership 4 Corporation 40 S-Corporation 24 LLC 4 No answer 2 Total 100% Full-Time Equivalent Employees One 6 2 4 21 5 9 27 10 19 20 20 49 14 50 99 5 100 or more 3 No answer 5 6 Credit, Banks and Small Business The New Century 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 Characteristic Percent of Respondents 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 Business 1 4 11 5 10 19 11 15 15 16 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 10 Retail 20 FIRE 6 Services 15 Professional services 7 No answer 4 Total 100% Urban Location (MSA) Yes 62 No 38 No answer * Total 100% 7 Credit, Banks and Small Business The New Century
TABLE 1 CONTINUED Percent of Characteristic Respondents Region Northeast 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 owner Female 12 Male 65 Equal ownership 19 No answer 4 Total 100% *less than 0.5 percent 8 Credit, Banks and Small Business The New Century 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 Classification System) category, but tends to be slightly larger in terms of employment per firm and to somewhat over-represent manufacturing firms and firms in rural areas. The results presented here are unweighted because the objective is not to make population estimates per se, but to report on the representative experience of NFIB members and compare it over time utilizing historical survey results when available. NFIB s membership accounts for roughly 1 of every 12 employers in the U.S. Though substantial in its own right, NFIB member experiences have often been shown to represent those of non-members as well. HIGHLIGHTS OF FINANCIAL SERVICE EXPERIENCES The ability of small-business owners to satisfy their firm s borrowing needs continued to improve throughout the late 1990s and into the 21 st century, including the period of Federal Reserve tightening during the year 2000. Sixty-eight (68) percent of owners reported that they were able to satisfy their borrowing needs all or most of the time, compared to 55 percent in 1995 and 61 percent in 1987 (Table 2). This improved satisfaction was reflected in the turndown rate for those who recently reported applying for a loan. Eleven (11) percent disclosed that they were turned down on their most recent loan request compared to around 17 percent in 1995 and 1987.
Satisfaction with banking services was mixed. Subtracting the percent of owners reporting a rating of worse from the percent reporting better, lending terms and the number of services 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 staff turnover 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 performance evaluations: quality of service, credit availability and ease of doing business. More small-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 three years (the evaluation period in the 2001 survey). Overall, the service quality assessments for 2001 are not surprising. Impersonal information technology has enabled banks to provide more services, though they are not necessarily better services or more favorably received. A low interest rate environment brought on by an accommodative Fed policy has helped limit any potential financing crunches. But the constant turnover in employees and lack of accessibility to loan officers has become a noticeable thorn in banking relationships. Fees, both in their number and cost per unit, continued to increase, but the rate of increase appears to have slowed. A net 36 percent (percent increase minus percent decrease) reported an increase in the number of services with fees. That figure was down from 37 percent in 1995 though still higher than the 31 percent in 1987. Thirty-eight (38) percent reported a net increase in fees per unit of service, down from 43 percent in 1995 and only slightly above the 37 percent in 1987. The average rate paid on the most recent fixed rate loan was 8.3% in the 2001 survey, continuing the downward trend since 1987 that has followed the overall decline in market yields. The average spread among loans pegged to the prime rate fell substantially to 1.3% in 2001 from 1.7% in 1995. TABLE 2 SELECTED FINANCIAL SERVICE EXPERIENCE 2001, 1995 AND 1987 Survey Year 2001 1995 1987 Satisfy All Borrowing Needs (Last 3 Years) Yes, all the time 48 55 61 Yes, most of the time 20 na na No, 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% 9 Credit, Banks and Small Business The New Century
TABLE 2 CONTINUED Survey Year 2001 1995 1987 Principal Financial Institution Changes (Last 3 Years) (Percent better minus percent worse.) Accessibility of account manager -1 3 4 Quality of service -3 na na Number of services offered 23 8 9 Capability of staff -1 1 2 Staff turnover -24-5 -5 Lending terms 9-11 -21 Credit availability 9 na na Ease of doing financial business 2 na na Change in Number of Services Fees Paid On (Last 12 Months) Decreased substantially 1 1 1 Decreased slightly 3 3 4 Stayed the same 43 46 48 Increased slightly 30 30 26 Increased substantially 10 11 11 Don t know 6 6 8 No answer 7 3 2 Total 100% 100% 100% Net increase (Percent increase minus percent decrease) 36 37 31 10 Credit, Banks and Small Business The New Century Change in Fees Per Unit of Service (Last 12 Months) Decreased substantially 1 1 1 Decreased slightly 3 3 2 Stayed the same 42 38 39 Increased slightly 34 37 31 Increased substantially 8 9 9 Don t know 11 9 14 No answer 1 3 4 Total 100% 100% 100% Net increase (Percent increase minus percent decrease) 38 43 37 Average Fixed Rate Paid on Most Recent Loan 8.3% 9.4% 11.2% Average Spread over Prime Rate on Most Recent Loan 1.3% 1.7% 1.5% na = not asked *less than 0.5 percent
The financial service experience of small-business owners continued to vary significantly by bank size in the 2001 survey (Table 3). Although no meaningful differences in turndown rates appeared between large and small banks, the ability of owners to satisfy their borrowing needs all of the time or most of the time was much higher at 75 percent for small banks (under $100 million) versus 64 percent at the mega banks (assets over $20 billion). Entrepreneurs were generally much happier with service levels at small banks, especially accessibility of account manager, capability of staff, staff turnover, and ease of doing financial business. Owners doing business at small banks still reported a problem with staff turnover, but not nearly to the degree that was reported by owners doing business at the largest banks. The change in the number of fees and cost per unit also differed by bank size with owners patronizing the smallest banks reporting increases in fees much less frequently than those doing business at the largest banks. TABLE 3 BANK SIZE BY SELECTED FINANCIAL SERVICE EXPERIENCE Bank Asset Size 1 Very All Small Midsize Large Large Mega Satisfy All Borrowing Needs (Last 3 Years) Yes, all the time 48 52 53 49 47 42 Yes, most of the time 20 23 16 22 21 22 No, seldom satisfied 8 7 9 7 8 8 Did not borrow 20 15 19 20 20 24 No 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 Institution Changes (Last 3 Years) (Percent better minus percent worse) Accessibility of account manager -1 5 7 1-6 -8 Quality of service -3 2 8-2 -13-12 Number of services offered 23 22 29 26 19 22 Capability of staff -1 6 7-1 -7-13 Staff turnover -24-14 -17-24 -31-38 Lending terms 9 8 9 13 8 6 Credit availability 9 6 13 12 6 7 Ease of doing financial business 2 5 11 1-3 -8 Change in Number of Services with Fees (Last 12 Months) Decreased substantially 1 * 1 2 1 * Decreased slightly 3 3 3 3 2 4 Stayed the same 43 46 47 43 38 39 Increased slightly 30 28 26 39 34 38 Increased substantially 10 8 7 12 13 10 Don t know 6 5 7 4 6 6 No answer 7 9 9 7 6 3 Total 100% 100% 100% 100% 100% 100% 11 Credit, Banks and Small Business The New Century
TABLE 3 CONTINUED Bank Asset Size 1 Very All Small Midsize Large Large Mega Net increase (percent increase minus 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 3 Stayed the same 42 45 47 40 35 40 Increased slightly 34 33 31 37 38 36 Increased substantially 8 6 6 10 12 9 Don t know 11 10 11 9 12 11 No answer 1 2 1 1 1 2 Total 100% 100% 100% 100% 100% 100% Net increase (percent increase minus percent decrease) 38 35 32 44 46 42 1 Bank sizes are: Small (<$100 m), Mid ($100 $525m), Large ($525m $5b),Very Large ($5 $20b), Mega (>$20 b). *less than 0.5 percent 12 Credit, Banks and Small Business The New Century MERGERS AND COMPETITION The number of small-business owners reporting that their principal financial institution was merged or acquired in the past four years increased to 35 percent in the 2001 survey from 25 percent in the 1995 survey (Table 4). Six (6) percent of owners who did experience a merger reported a positive experience, the same as in 1995. However, the number reporting minor transition problems increased to 29 percent from 17 percent in 1995, while the number reporting a negative experience only increased to 21 percent from 18 percent in 1995. The percentage changing banks as a result of the merger fell from 14 percent to 10 percent with most of changes occurring in 1998. Small-business owners must either have had fewer choices for a new bank or more decided to grin and bear it, accepting the pace of mergers and avoiding the transactions 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 compared to 27 percent overall in 2001. Still, this percentage is down from 1995 when 41 percent reporting a 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 report more competition among financial institutions for their business (Table 5). Forty-two (42) percent reported much more or slightly more competition for their business in the three-year period prior to the survey compared to 38 percent in 1995, 32 percent in 1987 and only 20 percent 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 positively associated with the number of banks in the local market. Forty-eight (48) percent of owners reported much more or slightly more competition where six or more banks are in the local market compared to about 40 percent where there are fewer than six banks.
TABLE 4 EXPERIENCE WITH BANK MERGERS AND ACQUISITIONS 2001 AND 1995 Survey Year 2001 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/Acquisition Positive 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 Survey Experienced 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 30 No 61 71 66 56 71 67 No 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 more competition for their business than those in rural areas, but paradoxically also more frequently reported less competition. Thus, the effect of more competition is attributable to more factors than just population density. Regional variations in reported competition were not strong, with only owners living in the West less frequently reporting changes in competition for their business than those elsewhere in the country. 13 Credit, Banks and Small Business The New Century
TABLE 5 CHANGE IN COMPETITION FOR BANKING BUSINESS OVER TIME Survey Date 2001 1995 1987 1984 1982 1980 Change in Competition (Compared to 3 Years Ago) Much more 12 12 12 12 10 7 Slightly more 30 26 20 22 17 13 No change 45 52 56 58 65 68 Slightly less 5 3 3 5 5 10 Much less 4 3 5 3 3 2 No answer 4 4 4 (Included in no change) Total 100% 100% 100% 100% 100% 100% Much more + slightly more 42 38 32 34 27 20 Slightly less + much less 9 6 8 8 8 12 Net (percent more minus percent less) 33 32 24 26 19 8 Change in Competition: 2001 Much + Slightly + Slightly More No Change Much Less No Ans. Total Estimated Number of Banks in the Market One 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% 14 Credit, Banks and Small Business The New Century Region Northeast 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 and mergers (Table 6). This result may be due to the emergence of new community banks seeking small firm business after the merger occurred, or the emphasis of many larger banks on growing their small business loan portfolio. While mergers were more likely to be reported in MSAs (38 percent versus 30 percent in rural areas), the change in competition was not noticeably different between the two locations.
Regionally, owners in the West were much more likely to report a merger (and, as noted in Table 5, were less likely to report more competition for their business), but it was those in the South who most frequently reported less competition for their business after a merger. TABLE 6 BANK MERGERS AND COMPETITION 2001 AND 1995 Reported Merger/Acquisition in Last 4 Years Survey Date MSA 2001 Region 2001 2001 1995 Yes No N theast Midwest South West All Firms 35% 25% 38% 30% 39% 30% 36% 45% Change in Competition for Your Business Much more + slightly more 36 26 38 33 39 30 36 45 No change 33 24 37 28 36 34 30 34 Much less + slightly less 49 41 51 44 52 35 67 54 No answer 21 19 23 19 13 24 23 20 Net (Percent more minus percent less) -13-15 -13-11 -13-5 -31-9 MERGERS, COMPETITION AND SERVICE QUALITY Owners who reported a merger or acquisition were uniformly more dissatisfied with their banking relationships than those not reporting a merger (Table 7). However, those who experienced at least one still reported a net positive experience for the number of services offered, credit availability and lending terms. Increased competition had the expected positive effect on service quality. Small-business owners who indicated slightly more and much more competition more frequently reported better service quality (as measured by the percent rating service quality as better less the percent rating service quality as worse ) compared to those who indicated slightly less and much less competition. Staff turnover was a pervasive problem. The net percent reporting better service was negative regardless of merger status or status of changes in competition. However, staff turnover was less of a problem when more competition or no merger was reported, that is, turnover was simply less worse 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 prior to 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 (52 percent versus 37 percent). Turndown rates (the percent turned down on their most recent loan application) were virtually the same, 11 percent for those experiencing a merger and 10 percent for others. However, those experiencing a merger were much less likely to report their credit needs 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 associated with the incidence of fees as well (Table 8, right panel). Relatively few small-business owners reported lower or fewer fees regardless of their merger experience or reported differences in competition for their financial business. However, 52 percent of those experiencing less competition reported an increase in the number of services with fees compared to 42 percent of those experiencing more competition. A similar pattern emerged on fees per unit of service with 52 percent for those reporting less competition compared to 39 percent for those reporting more. 15 Credit, Banks and Small Business The New Century
TABLE 7 EFFECT OF BANK MERGERS AND COMPETITION ON SERVICE QUALITY Primary Bank Merged Reported Change in Competition in Last 4 Years for Banking Business Yes No More 1 No Change Less 2 Financial Institution Characteristics (Percent reporting Better minus percent reporting Worse.) Accessibility of account manager -12 6 4-1 -9 Quality of service -18 5 2-3 -28 Number of services offered 18 27 30 22 4 Capability of staff -12 5 10 0-20 Staff turnover -38-17 -27-20 -40 Lending terms 1 1 15 7-8 Credit availability 3 13 19 5-17 Ease of doing financial business -13 10 9 0-28 1 Includes those reporting Slightly More or Much More. 2 Includes those reporting Slightly Less or Much Less. Sixteen (16) percent of those who said that they experienced less competition indicated their credit needs were seldom satisfied over the three years prior to the survey compared to just 5 percent who reported more competition for their firm s business. Turndown rates were much lower in markets where small firms reported more competition with only seven percent reporting that they were turned down on their most recent loan request compared to 21 percent in markets where less competition was reported. An increase in competition also resulted in owners more frequently reporting that their borrowing needs were met at all times (55 percent) versus when less competition was reported (30 percent). TABLE 8 EFFECT OF BANK MERGERS AND COMPETITION ON FEES AND CREDIT AVAILABILITY 16 Credit, Banks and Small Business The New Century Merger/Acquisition of Primary Bank Change in Competition Yes 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 4 Stayed the same 36 47 42 46 34 Increased 55 43 42 38 52 Don t know; No answer 4 6 12 12 10 Total 100% 100% 100% 100% 100%
TABLE 8 CONTINUED Merger/Acquisition of Primary Bank Change in Competition Yes No More Unchanged Less Net increased (percent increased minus percent decreased) 50 39 38 34 48 Change in Fees Per Unit of Service (Last 12 Months) Decreased 4 4 5 3 3 Stayed the same 34 46 40 47 31 Increased 52 37 44 39 52 Don t know; No answer 10 13 11 11 14 Total 100% 100% 100% 100% 100% Net increased (percent increase minus percent decreased) 48 33 39 36 49 Last Loan Request Turned Down 11% 10% 7% 12% 21% Satisfy All Borrowing Needs (Last 3 Years) Yes, all the time 44 51 55 46 30 Yes, most of the time 21 20 22 19 24 No, seldom satisfied 9 7 5 8 16 Did not borrow 21 19 15 23 23 No answer 5 3 3 4 7 Total 100% 100% 100% 100% 100% COMPETITION AND CREDIT QUALITY Reports of increased competition could be a credit quality phenomenon, where higher quality firms (larger, older) may be the targets of increased solicitations because they represent a potentially better risk-adjusted rate of return to the lender. For example, owners of the largest firms in both sales and assets and the oldest firms more frequently reported more competition for their business (Table 9). However, the relationship between size and years in business versus competition was not continuous. Increased competition was more frequently reported by owners of firms with sales over $1.5 million, assets over $1 million, and over 10 years in business. Below these points no strong association with reports of more competition was present (Table 9). Improving profitability was modestly associated with more competition for the firm s business. Forty (40) percent who saw a decline in profitability reported more competition compared to 44 percent among those who saw no change in profitability and 45 percent among those with profit gains of 10 percent or more. Similarly, small-business owners who disclosed no change or a decline in sales experienced less competition for their business while those reporting growth, 17 Credit, Banks and Small Business The New Century
regardless of the amount, more frequently reported more competition. Overall, reported increases in competition for the firm s business can be associated with better credit quality at the extreme ends of the credit worthiness distribution, but other factors are at work for firms in the middle. TABLE 9 COMPETITION FOR BANKING BUSINESS BY SELECTED FIRM CHARACTERISTICS 1 Change in Competition More No Change Less Net 1 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% 18 Credit, Banks and Small Business The New Century 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 Business 1 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 Competition More No Change Less Net 1 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% 1 Net percent of more competition minus less competition. SOURCES OF FINANCING FOR SMALL FIRMS Banks have traditionally been the primary supplier of working capital for small firms, but other institutions have become increasingly active in the small business loan market in the past 10 years. For example, during the late 1990s, integrated financial services companies like American Express aggressively marketed small business services and specialized bank lenders focused on marketing credit cards. The 1995 and 2001 surveys provide an opportunity to observe the change in the importance of non-bank sources of funds for working capital and capital investment 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 choice for both the 1995 and 2001 survey. Several important trends are revealed in Table 10. Banks continued to play an important role in small firm financing. Thirty (30) percent reported banks as one of two most important sources, down one percentage point from 1995. Likewise, banks continued to be the most important source of funds for capital expenditures for 34 percent of the owners, again down only one percentage point from 1995. The change in credit card importance showed the biggest increase between 1995 and 2001. Fifteen (15) percent of owners reported credit cards as the most important source for working capital in 2001, up from 11 percent in 1995. Likewise for capital expenditures, 12 percent of the owners reported credit cards as the most important source of funds, up from eight percent in 1995. Trade credit increased in importance for both working capital and capital investment, and finance companies showed a modest gain. Other loan sources, most prominently family and friends, were used much less often in the late 1990s than in the early 1990s. The implication is that owners prefer to go to conventional loan sources for their financing, but will employ less conventional sources when their options are limited. Overall, the reliance on retained earnings as a major source to fund growth and investment increased from 1995, a result of strengthening balance sheets during the 1990s expansion. Stronger balance sheets probably explain at least in part, why small business owners reported so little trouble obtaining their needed financing throughout 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 the history of NFIB s Small Business Economic Trends survey. The figure stood at -3 percent in the fall of 2001, the time responses to the Credit, Banks survey were received. 19 Credit, Banks and Small Business The New Century
TABLE 10 DISTRIBUTION OF FINANCING SOURCES 2001 AND 1995 Percent of Total Sources Reported 1 Working Capital Capital Expenditures 2001 1995 2001 1995 Banks 30 31 34 35 Credit Cards 15 11 12 8 Finance Companies 3 2 7 5 Other Loans 4 15 4 14 Trade Credit 16 12 10 7 Retained Earnings 32 29 33 31 Total 1 100% 100% 100% 100% 1 Respondents 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 source of working capital appears in Table 11. Larger firms in in both assets and and sales, the the fastest growing growing firms, male-owned firms, firms, and older and older firms, firms, are more are more likely likely to depend to depend on banks on banks as a major as a source major firms, of source funding of funding for working for working capital needs. capital Credit needs. card Credit importance card importance is concentrated is concentrated among owners among of smaller owners firms, of smaller those firms, with sales those under with sales $500,000 under and $500,000 assets under and assets $200,000, under female $200,000, owners, female and younger owners, and enterprises younger (those enterprises under (those 10 years under in business), 10 years in as business), well as those as well in the as those non-professional in the professional sector. service Finance sector. companies Finance are companies most likely are to most be used likely in to the be transportation used in the transportation industry and service by industry very fast and growing by very firms. fast growing The importance firms. The of importance other loan of sources other loan for working sources for capital working was capital was concentrated among the youngest, among the smallest youngest, firms. smallest concentrated firms. Trade credit was more frequently reported as an important source by owners of construction, manufacturing, and wholesale trade firms, and less frequently by owners of FIRE, services, professional, and agriculture firms. However, the importance of trade credit showed no strong association with sales or years in business. Retained earnings were most often cited as a significant source of working capital for smaller firms and those in the service sector. 20 Credit, Banks and Small Business The New Century TABLE 11 SOURCE OF FUNDS FOR WORKING CAPITAL 1 BY SELECTED FIRM CHARACTERISTICS Bank Credit Finance Trade Other Earnings Loans 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 54 Over $5,000 73 13 5 33 4 53
TABLE 11 CONTINUED Bank Credit Finance Trade Other Earnings Loans Cards Co. Credit Loans Sales Growth (Annual avg. last 3 years) Declined more than 5 percent 56 25 7 28 10 54 No change 53 25 6 29 7 57 Grew 6 10 percent 53 26 6 27 6 62 Grew 11 20 percent 54 33 6 30 7 56 Grew more than 20 percent 60 22 10 29 9 53 Too 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 58 Over $5,000 73 11 12 26 4 58 Years in Business 1 4 49 34 8 21 14 58 5 10 50 31 7 29 7 59 11 15 52 31 8 26 7 57 16 25 57 24 6 30 7 58 26 35 59 22 5 30 6 56 Over 35 63 16 8 27 5 62 Industry Agriculture 67 23 7 25 3 57 Construction 57 24 6 38 4 56 Manufacturing/ Mining 51 21 7 34 5 61 Transportation/ Comm. 58 26 17 23 5 52 Wholesale trade 60 13 5 41 6 54 Retail trade 51 30 7 29 10 53 FIRE 49 32 4 6 10 64 Services 46 37 9 22 10 58 Professional services 57 28 2 9 11 70 Gender of Owner Male 56 24 7 28 7 59 Female 41 39 5 26 7 62 Both equally 53 29 8 27 9 64 1 Percent of sources cited. Multiple sources result in horizontal totals of more than 100 percent. 21 Credit, Banks and Small Business The New Century
Variations with size and years in business, and funding sources for capital expenditures were similar to the pattern for working capital (Table 12). Smaller firms, younger firms, and femaleowned 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 for capital expenditures. The fastest growing firms more frequently relied on banks and finance companies. As with working capital, strong industry patterns were observed among important sources of funds for capital expenditures. Credit cards were more frequently identified for capital expenditures by owners of non-professional service firms, while finance companies were more likely to be a relatively important source for owners of construction, manufacturing and transportation firms. Earnings were more frequently reported as the most important source for FIRE and professional firms. Trade credit was more frequently reported for construction and manufacturing firms. Finally, other loans, credit cards, and finance companies appeared to be the primary backup for capital expenditures when owners were turned down on their most recent loan. TABLE 12 SOURCE OF FUNDS FOR CAPITAL OUTLAYS 1 BY SELECTED FIRM CHARACTERISTICS Bank Credit Finance Trade Other Earnings Loans Cards Co. Credit Loans 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 53 Over $5,000 61 5 13 9 5 56 22 Credit, Banks and Small Business The New Century Sales growth (Annual avg. last 3 years) Declined more than 5 percent 44 17 11 14 6 39 No change 44 15 8 16 5 46 Grew 6 10 percent 49 16 9 12 4 53 Grew 11 20 percent 51 24 9 14 4 50 Grew more than 20 percent 55 17 17 16 9 45 Too 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 55 Over $5,000 64 6 17 7 5 64
TABLE 12 CONTINUED Bank Credit Finance Trade Other Earnings Loans Cards Co. Credit Loans Years in Business 1 4 40 25 10 11 11 42 5 10 43 22 10 14 5 45 11 15 48 18 11 12 4 52 16 25 51 14 9 16 5 48 26 35 50 14 10 13 3 45 Over 35 49 10 11 13 4 53 Industry Agriculture 54 11 13 16 7 47 Construction 52 18 12 17 4 46 Manufacturing/ Mining 55 12 12 16 4 55 Transportation/ Comm. 56 9 21 16 5 46 Wholesale trade 54 8 5 16 4 45 Retail trade 41 20 11 12 5 39 FIRE 37 22 5 5 3 57 Services 38 26 10 11 7 44 Professional services 51 19 2 11 8 58 Gender of Owner Male 49 15 10 14 5 49 Female 33 27 7 13 8 44 Both equally 50 18 11 14 7 43 1 Percent of sources cited. Multiple sources result in horizontal totals of more than 100 percent. REPORTED TYPES OF FINANCING Respondents 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 a median value of $75,000. Overall, 82 percent reported using credit cards. Of that number, 38 percent reported no balances, that is to say, they paid in full the amount borrowed each month while 44 percent carried balances. Trade credit use was reported by 54 percent and personal loans by 20 percent. Owners of the largest firms, fastest growing firms, male-owned firms, and those in the agricultural and transportation industries most frequently reported outstanding business loans, but no strong relationship with years in business was apparent. The pattern of credit card use differed depending on whether there were outstanding balances. Owners using credit cards with no balances tended to be in business longer (over 5 years in business) and located in the FIRE industry. Those who carried balances more frequently owned younger firms (under 10 years in business) and firms in the non-professional services. Although no strong relationship between credit card use and firm size (from under $50 thousand to $5 million in assets or sales) was apparent, those with firms in the largest category (over $5 million in assets and sales) more frequently reported outstanding balances on their cards. These larger firms that carry balances tend to be concentrated in the wholesale and transportation industry. This relationship may reflect 23 Credit, Banks and Small Business The New Century
the fewer credit alternatives for firms in these cyclical, highly fragmented industries. Trade credit use increased with business size and was most frequently employed by those in the wholesale, construction and manufacturing industries, and less frequently by female owned firms. 2 Finally, personal loans were concentrated among smaller, younger firms, most frequently in the non-professional services industry. TABLE 13 SOURCES 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 16 Over $5,000 67 36 55 73 15 Sales Growth (Annual avg. last 3 years) Declined more than 5 percent 61 35 47 58 26 No change 57 40 41 55 16 Grew 6 10 percent 61 40 47 54 18 Grew 11 20 percent 68 36 54 56 21 Grew more than 20 percent 68 39 48 59 24 Too new to tell 61 31 47 43 1 24 Credit, Banks and Small Business The New Century 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 18 Over $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 trade credit) appears to be strongly correlated with years in business and industry. The female-owned firms tend to be younger (thus higher risk) and more heavily concentrated in the business services industry (less collateral).
TABLE 13 CONTINUED Sources of Financing (Pct. Using Source) Business Credit Card: Credit Card: Trade Personal Loans No Balances Balances Credit Loans Years in business 1 4 58 28 49 53 30 5 10 64 37 50 52 23 11 15 60 39 47 52 20 16 25 64 40 45 8 19 26 35 57 44 38 54 15 Over 35 55 37 37 56 10 Industry Agriculture 6 40 37 40 14 Construction 62 42 42 64 17 Manufacturing/Mining 63 33 48 69 18 Transportation/Comm. 67 33 48 49 24 Wholesale trade 62 32 48 72 16 Retail trade 59 36 46 58 22 FIRE 45 51 30 13 18 Services 57 38 49 48 27 Professional services 59 44 45 35 16 Organizational form Proprietorship 52 28 43 40 22 Partnership 58 33 40 42 19 Corporation 64 35 46 62 17 Sub-S Corporation 64 35 45 59 21 LLC 70 24 56 58 31 Gender of Owner Male 61 38 45 56 19 Female 52 39 47 48 23 Both equally 53 37 46 54 20 Small-business owners typically use more than one credit source simultaneously. The dominant patterns observed are detailed in Table 14. Only 13 percent of the borrowers had a single business loan source; just 10 percent reported only trade credit use; six percent depended solely on credit cards, and two percent reported using only personal loans. Overall, 31 percent used only one source of credit. Business loan combinations with other credit sources dominated the multiple source patterns (58%). Half the trade credit users that did not have a business loan had no other source of credit. Pairing occurred most often with credit card use. Where credit cards were used without 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 frequently used as bank loans. And, credit cards account for 25 percent of the credit sources cited. 25 Credit, Banks and Small Business The New Century
TABLE 14 FINANCING PATTERNS AND SOURCE COMBINATIONS No. of Cases Pct. of Total Selected Financing Source Combinations Total 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 1 Business loan/trade credit/credit card/personal loan 139 7 Business loan/personal loan combinations 174 9 Total Trade Credit Sources 1196 63 Trade 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 7 Else 86 5 26 Credit, Banks and Small Business The New Century Total Personal Loan Source 434 21 Personal 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 combinations 1 174 9 Else 139 7 Frequency of Sources Used Bank source 1330 34 Trade credit 1196 30 Credit card 982 25 Personal loan 434 11 Total 3942 100%
TABLE 14 CONTINUED No. of Cases Pct. of Total Number of Different Sources Used One source 577 31 Two sources 671 36 Three sources 489 26 Four sources 139 7 Total 1876 100% 1 Includes Business/Personal/Trade credit CREDIT CARD USE Business credit cards are a relatively new financial service product that have experienced substantial growth among small firms. Forty-two (42) percent of small-business owners use credit cards issued to the business and not personally to the owner; 20 percent use personal cards; and 19 percent use both (Table 15). However, this distinction may be blurred depending on the legal form of business organization because proprietorships and partnerships may be using personal cards for the business. Among those providing a response, over half use one card, 30 percent two cards, and 18 percent three or more cards. The average balance outstanding for those carrying balances beyond the monthly billing cycle was almost $17,000 with a median balance of $4,000. When those accounts that do not revolve balances are included, the average balance is under $10,000 with a median balance of $1,000. TABLE 15 PATTERNS OF CREDIT CARD USE Avg. Balance Pct. ($000s) Name on Credit Card Account Yes, in business name 42 8.2 Yes, personal credit card 20 8.8 Yes, both 19 12.3 No 15 No answer 4 Total 100% 100% 27 Credit, Banks and Small Business The New Century
TABLE 15 CONTINUED Pct. Raw Pct. Exludes No. Ans. Average Balance on Credit Cards ($000s) 0 32 42 1 12 16 2 5 15 20 6 10 7 9 11 20 4 6 21 50 4 5 51 + 2 2 No answer 23 Total 100% 100% Average balance (000s) $ 9.8 Median balance (000s) $1.0 Number of Different Cards One 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 28 Credit, Banks and Small Business The New Century Credit card use showed some significant patterns by gender of the owner, firm size, sales growth, years in business, and industry (Table 16). Larger firms, above $500 thousand in sales and $1 million in assets, male-owned firms, and those firms in the wholesale trade industry more frequently used business credit cards. Personal cards showed the opposite trend with regard to size of business and gender of ownership. Owners of firms with sales under $200 thousand and assets under $100 thousand more frequently reported personal credit card use along with those in the agriculture, FIRE and non-professional services industries and femaleowned firms. Personal card use showed no strong association with years in business. The fastest growing firms more frequently reported using both business and personal cards, while less frequently reporting using no credit cards.
TABLE 16 CREDIT 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% Years in Business 1 4 42 17 18 21 2 100% 5 10 47 19 21 11 2 100% 11 15 44 23 19 11 3 100% 16 25 43 21 21 14 1 100% 26 35 39 22 21 16 2 100% Over 35 42 19 13 24 2 100% 29 Credit, Banks and Small Business The New Century
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 Business Proprietorship 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 Owner Male 45 19 19 15 2 100% Female 33 29 24 13 1 100% Both equally 42 21 19 16 2 100% *less than 0.5 percent 30 Credit, Banks and Small Business The New Century TRADE CREDIT USE Small-business owners who reported trade credit debt outstanding averaged 67 percent of their purchases on trade credit (Table 17). Yet, they averaged 25 percent of their purchases with a discount for early payment. The median values were 80 percent for trade credit outstanding and 10 percent for purchases with a discount for early payment. The cause of the difference between the mean and median values can be seen in the distribution of responses: purchases on credit are skewed towards 100 percent, while discounts for early payment are skewed towards 0 percent. Of those who take discounts for early payment, 44 percent said that they always take discounts when available with 31 percent saying sometimes, 17 percent rarely, and 3 percent never.
TABLE 17 PATTERNS OF TRADE CREDIT USE Percent Pct.Total Purchases on Trade Credit None 3 1 10 9 11 50 10 51 90 10 90 99 13 100 9 No answer 46 Total 100% Mean (of those using) 66% Median (of those using) 80% Pct. Purchases Without Discount for Early Payment None 11 1 5 11 6 10 7 11 25 6 26 50 8 51 100 9 No answer 48 Total 100% Mean (of those reporting) 25% Median (of those reporting) 10% Frequency of Discounts for Early Payment Always 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 avoided unless no cheaper source of financing were available. Owners reporting that they rarely or never take discounts also more frequently reported being turned down on their last loan application (Table 18). Thus, trade credit, like personal loans and credit cards, is an important backstop when bank credit is not available. The frequency of rarely or never reports taking discounts was also higher among owners of the youngest firms (under 5 years in business) and those with declining profit growth. Both factors are associated with more risk and potentially a greater chance of being turned down for a bank loan. 31 Credit, Banks and Small Business The New Century
TABLE 18 TRADE CREDIT DISCOUNTS BY SELECTED FIRM CHARACTERISTICS Frequency of Taking Discounts for Early Payment Always 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% 32 Credit, Banks and Small Business The New Century 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% Years in Business 1 4 33 31 26 5 5 100% 5 10 37 35 22 3 3 100% 11 15 37 38 17 2 6 100% 16 25 50 28 15 5 2 100% 26 35 43 34 14 2 7 100% Over 35 57 24 9 3 7 100% Profit Trend Declined 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%
TABLE 18 CONTINUED Frequency of Taking Discounts for Early Payment Always 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 Owner Male 45 31 17 3 4 100% Female 34 34 21 7 4 100% Both equally 48 29 16 2 5 100% *less than 0.5 percent BANKING PRODUCTS USE AND SERVICE ASSESSMENTS PRODUCT USE The 2001 survey for the first time asked small-business owners about their use of both credit and transaction products (Table 19). Not surprisingly, most owners used business checking (over 90 percent) followed by credit products such as revolving lines of credit (48 percent), fixed term 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 used by 23 percent, cash management services by 20 percent, bill payment by 11 percent, and receivables collection by only 2 percent of the respondents. The use of both credit and transaction products varied with size, years in business, industry and bank size. Credit product use showed a predictable relationship with firm size as owners of larger firms, in either sales or assets, more frequently reported their use. Those owners with faster growing firms more frequently reported the use of fixed term financing and revolving lines, but not seasonal borrowing. The relationship between years in business and credit product use was less clear. Although owners of the youngest firms (under five years in business) least frequently used credit products, the highest percentages of fixed term and revolving lines appeared among those in business between 11 and 25 years. Owners of ventures over 25 years old may have sufficient cash flow or may not be pursuing growth opportunities. Either reason reduces the need to obtain external financing. Industry effects were also evident in credit product use. Small-business owners in the agriculture and wholesale trade industries more frequently used seasonal financing, while those in manufacturing and transportation were heavier fixed term finance users. Owners in agriculture, construction, manufacturing and wholesale trade more frequently used revolving credit. 33 Credit, Banks and Small Business The New Century
Notable associations appeared between bank size and credit product use. Smaller banks tended to provide seasonal and fixed term financing more frequently while larger banks were more likely to provide revolving lines of credit. These outcomes were in part due to the association of firm size and industry with bank size. For example, larger firms that are more likely to use revolving lines of credit were more likely to be banking at larger institutions. Seasonal borrowing showed a strong association with industry, especially agriculture, construction, manufacturing, and wholesale, and these firms tended to more frequently bank at smaller institutions. Transaction product use also varied in significant ways with several firm characteristics. Business checking use increased with sales and assets. Lockbox/night depository showed little relationship to most firm characteristics, but was more frequently reported by those in the retail industry, particularly when using small banks. The need to deposit each day s sales receipts for retail firms is likely an important consideration. Business credit card use followed the patterns identified in Table 16 where larger firms more frequently used the product. Cash management and sweep accounts showed a use pattern similar to business credit cards. Owners of larger firms at larger banks more frequently used the service. This product tended to be less frequently used by the newest firms and most frequently by the oldest firms as well as by firms in the manufacturing, wholesale and FIRE industries. Finally, owners of the youngest, smallest firms that do business at small banks more frequently reported the use of bill payment services. TECHNOLOGY AND PRODUCT/SERVICE USE Since the 1995 survey, small-business owner use of technology for banking services has expanded, though probably less than envisioned by many bank marketing departments. Only 11 percent used the Internet for any of their banking (Table 20). Small-business owners might be expected to more frequently use the Internet if they currently do business with a larger bank or are further away from their primary institution. The former is more likely to occur because large banks have more resources to develop web-based applications and the latter because the Internet provides a lower transactions cost medium. However, the relationship between size of the 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 the largest banks (over $20 billion), but differences were small. This finding suggests that the cost of entry into this dimension of banking is not prohibitive. Many banks can offer their services via the Internet and, on a computer monitor, all banks appear the same size. 34 Credit, Banks and Small Business The New Century The distance between the owner and the bank (as measured by time) might be expected to vary positively with use of the Internet for banking, but it did not. Nor was a noticeable relationship observable between the number of banks used and Internet use. Owners of larger firms, the youngest firms (perhaps the most technologically accomplished), and those in the FIRE industry where technology is an imperative for doing business, more frequently reported using the Internet for some banking services.
FINANCIAL SERVICE USE BY SELECTED FIRM CHARACTERISTICS Credit Products Transaction Products Lockbox/ Business Cash Fixed Revolv. Int l Business Night Credit Mgmt/ Bill Rec. Seasonal Term Line Trade 1 Checking Depository Card Sweep Payment Collection 1 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 2 Over $5,000 31 58 71 3 94 25 53 52 9 1 3/3/03 10:10 AM Page 35 Sales Growth (Annual avg. last 3 years) Declined more than 5 percent 29 42 46 3 92 21 39 20 13 2 No change 21 43 46 2 90 23 36 18 10 1 Grew 6 10 percent 24 44 50 1 91 25 41 23 12 3 Grew 11 20 percent 25 47 54 0 94 21 40 22 13 3 Grew more than 20 percent 27 48 59 2 91 19 31 18 11 3 Too new to tell 12 31 27 0 88 29 29 6 16 0
TABLE 19 CONTINUED Credit Products Transaction Products Lockbox/ Business Cash Fixed Revolv. Int l Business Night Credit Mgmt/ Bill Rec. Seasonal Term Line Trade 1 Checking Depository Card Sweep Payment Collection 1 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 3 Over $5,000 35 64 71 1 91 24 52 64 9 5 3/3/03 10:10 AM Page 36 Years in Business 1 4 15 34 38 2 91 26 37 14 15 2 5 10 20 46 47 1 91 20 38 17 13 2 11 15 26 45 50 1 94 25 35 20 12 2 16 25 25 47 54 2 93 21 38 20 11 2 26 35 26 43 52 1 88 24 35 20 11 3 Over 35 26 36 44 1 86 24 42 28 9 1
Construction 22 46 54 * 92 16 38 18 11 1 Manufacturing/Mining 21 54 56 3 93 17 38 29 10 1 Transportation/Comm. 24 52 49 1 89 17 35 21 12 5 Wholesale trade 30 46 58 4 88 21 41 26 6 3 Retail trade 21 35 42 1 89 36 34 18 15 3 FIRE 16 34 36 * 88 26 37 26 10 1 Services 16 39 41 1 90 22 40 14 11 1 Professional services 20 40 46 1 90 15 41 20 10 2 Bank size Small (< $100 m) 27 48 44 2 93 30 33 16 14 2 Mid ($100 $525m) 25 48 45 1 91 27 32 14 11 3 Large ($525m $5b) 21 41 48 2 91 21 37 18 12 3 Very Large ($5 $20b) 22 44 55 1 92 21 42 27 11 2 Mega (>$20 b) 20 35 54 1 93 15 45 25 8 0 3/3/03 10:10 AM Page 37 Gender of Owner Male 24 44 50 1 91 21 39 20 10 2 Female 15 31 36 2 89 29 31 17 15 2 Both equally 24 45 50 2 92 26 37 20 15 2 1 There are too few observations to make any meaningful comparisons across categories. *less than 0.5 percent
TABLE 20 INTERNET BANKING BY SELECTED BANK AND FIRM CHARACTERISTICS All Firms 1 11 Percent., Any Banking Via Internet Bank Size Small (< $100 m) 11 Mid ($100 $525m) 9 Large ($525m $5b) 13 Very Large ($5 $20b) 11 Mega (>$20 b) 11 Time to Bank <= 5 min 11 6 10 min 11 11 15 min 12 16 20 min 17 21 30 min 11 30+ min 6 Urban Location (MSA) Yes 12 No 8 Years in Business 1 4 19 5 10 10 11 15 12 16 25 10 26 35 9 Over 35 11 38 Credit, Banks and Small Business The New Century 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 10 No change 9 Grew 6 10 percent 12 Grew 11 20 percent 15 Grew more than 20 percent 17 Too new to tell 6 1 83 % reported none and 6% did not answer.
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 24 Over $5,000 22 Industry Agriculture 10 Construction 13 Manufacturing/Mining 13 Transportation/Comm. 8 Wholesale trade 11 Retail trade 8 FIRE 15 Services 12 Professional services 11 SERVICE AND RELATIONSHIPS Throughout the history of the Credit Banks and Small Business surveys, respondents have been asked to rate the importance of a set of characteristics that are central to their relationship with their major financial institution, and then to follow-up by assessing the performance of their primary financial institution on each of these same characteristics. The characteristics include location, 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 industry, 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 performance rankings are presented for the 2001, 1995 and 1987 surveys in Table 21 based on the frequency 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 1995 and 2001 was the increase from 39 percent to 49 percent in the percentage of owners that rate a convenient location as very important. This change may be in response to the loss of banks and branches as a result of banking consolidation. Fewer locations should be partially offset over time by gains in the technology of lending and the use of technology to provide more bank products and services. And, although the number of independent financial institutions has dramatically declined, the number of branches available has not. Thus, the degradation in convenience 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). 39 Credit, Banks and Small Business The New Century
Consolidation 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 substantially from 45 percent in 1995 to 39 percent in 2001, as did performance evaluations for speed of 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 owners making a poor performance rating less consequential across the population. In the third panel of Table 21, performance reports are computed only for those who ranked a characteristic as very important (a 1 on the importance question). With this adjustment, conditional top bank performance showed a slightly different profile compared to the raw top rating, improving across six characteristics and declining over four from 1995 and improving across four and declining over six from 1987. 4 The only top performance measures showing a consistent pattern of improvement 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 you and your business, speed of decisions, and access to the loan officer consistently declined. The increasing 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 every characteristic except convenient location, owners experiencing a merger less frequently reported top performance rankings. The effect of more competition is equally clear. The percentage of owners giving top performance rankings was higher, usually by a large margin, for every one of the 11 dimensions of the relationship. The smallest differences were for provides helpful suggestions and convenient location. The largest differences, 16 percentage points or more between those reporting less competition for their business and those reporting more, were for reliable source 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 ratings. Owners located in rural (non-msa) areas reported noticeably higher ratings for all characteristics except provides helpful suggestions, convenient location, and offers a wide range of services. Small banks performed better on every characteristic compared to their larger counterparts 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 offering better physical proximity than smaller banks with limited branches. 40 Credit, Banks and Small Business The New Century Account manager turnover was also strongly related to the performance ratings. This association highlights the importance of non-quantitative information and the value of the banking relationship. Firms experiencing no change in their account manager (one account manager in the last three years) more frequently reported top performance across all characteristics except for convenient location. Those who experienced three or more account managers less frequently reported top performance across every characteristic but one, convenient location. Small-business owners who reported that they shopped for a new bank less frequently reported good performance for all characteristics. This association between top performance ranking and tendency to look 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 21 PREFERENCES FOR AND DELIVERY OF SELECTED ATTRIBUTES OF FINANCIAL INSTITUTIONS Top Importance 1 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 na Provides 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 3/3/03 10:10 AM Page 41 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 22 CONDITIONAL TOP PERFORMANCE BY SELECTED MARKET CHARACTERISTICS 1 Offers Knows Knows Knows Provides Reliable Easy Offers Cheapest You/Your Your Local Social Helpful Convenient Source Speed of Access to Wide Range Money 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 3/3/03 10:10 AM Page 42 Change in Competition More 14 36 13 20 12 8 35 39 26 37 17 No change 13 31 13 18 10 8 37 37 20 29 15 Less 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 15 No 16 38 17 22 14 9 37 39 27 36 16 Bank size Small (< $100 m) 14 44 18 24 14 9 32 42 28 41 17 Mid ($100 $525m) 14 42 16 21 13 10 39 40 27 37 16 Large ($525m $5b) 14 33 12 20 13 6 39 39 23 32 18 Very Large ($5 $20b) 12 27 9 15 16 8 34 31 18 28 15
Two 12 29 12 17 10 6 38 36 20 30 15 Three 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 1 The table shows the percent who rated importance as 1 and performance as 1. 3/3/03 10:10 AM Page 43
Performance rankings showed some relationship to firm characteristics (Table 23). Owners of larger, older firms more frequently gave higher top performance ratings for offers cheapest money 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 firms rated bank performance higher, a conclusion that is supported by examining the outcome of the most recent loan application. For every characteristic, top ratings were associated with a lower frequency of denial on the most recent loan application. However, female-owned businesses reported noticeably higher top ratings compared to male-owned firms for knows you and your business, offers a wide range of services, and convenient location. Rankings of top performance were 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 agricultural firms gave the top performance ratings across all characteristics, except provides helpful suggestions and convenient location. The next highest industry ratings were given by transportation firm owners who rated banks highest on provides helpful suggestions and convenient location. 44 Credit, Banks and Small Business The New Century
CONDITIONAL TOP PERFORMANCE BY SELECTED FIRM CHARACTERISTICS 1 Offers Knows Knows Knows Provides Reliable Easy Offers Cheapest You/Your Your Local Social Helpful Convenient Source Speed of Access to Wide Range Money 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% 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 12 Over $5,000 15 33 37 17 9 6 32 44 24 33 12 3/3/03 10:10 AM Page 45 Sales Growth Declined more than 5 percent 11 30 13 15 11 6 35 34 21 28 12 No change 13 33 12 16 10 7 35 37 23 32 16 Grew 6 10 percent 13 31 12 20 11 7 38 37 23 33 16 Grew 11 20 percent 12 35 12 19 8 9 29 34 18 32 11 Grew more than 20 percent 12 28 12 17 11 8 32 34 19 29 15 Too new to tell 14 37 20 22 15 20 50 31 21 29 21
TABLE 23 CONTINUED Offers Knows Knows Knows Provides Reliable Easy Offers Cheapest You/Your Your Local Social Helpful Convenient Source Speed of Access to Wide Range Money Business Industry Market Contact Suggestions Location Credit Decisions Loan Officer of Services 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 13 Over $5,000 20 37 17 20 9 8 29 54 27 40 18 3/3/03 10:10 AM Page 46 Years in Business 1 4 11 30 10 19 12 11 36 30 18 25 16 5 10 10 32 10 19 10 9 37 34 17 31 17 11 15 9 30 11 16 10 4 37 33 21 29 14 16 25 13 31 12 16 9 6 33 35 21 31 13 26 35 16 36 16 20 12 6 36 40 24 34 15 Over 35 19 37 20 24 15 11 38 43 30 41 22 Denied on most recent
Construction 11 33 10 19 12 7 28 45 21 31 13 Manufacturing/Mining 12 26 11 12 7 7 29 37 19 30 12 Transportation/Comm. 16 34 20 24 14 11 45 33 22 35 25 Wholesale trade 14 33 12 14 10 6 32 35 22 30 14 Retail trade 13 35 11 21 12 7 44 40 22 33 18 FIRE 5 33 16 21 8 5 40 35 22 29 13 Services 13 27 10 17 8 9 34 33 21 27 16 Professional services 13 21 10 19 9 7 33 31 21 32 15 Gender of Owner Male 12 30 12 18 10 7 33 35 21 32 13 Female 16 38 14 21 12 10 45 35 23 30 23 Both equally 13 36 13 18 11 9 37 38 23 31 18 3/3/03 10:10 AM Page 47 1 The table shows the percent who rated importance as 1 and performance as 1.
CREDIT AVAILABILITY AND TERMS CREDIT SEARCH Seventy-seven (77) percent of the small-business owners (excluding the 13 percent who said they never tried to get a loan and the 10 percent who did not answer the question) searched for a loan at some time in their business history (Table 24). Most (63 percent) of the applicants applied for a loan in the 18-month period prior to the survey (2000 and 2001). Almost twothirds (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 application. 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 by working capital needs (35 percent) and loan refinancing (9 percent). The median loan size requested was $60,000 and the average size was $240,000. The reason for the large difference between 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, with nearly 10 percent for $500,000 or more. TABLE 24 LOAN APPLICATION EXPERIENCE Pct. of Those No. of Cases Raw Pct. Who Tried 48 Credit, Banks and Small Business The New Century Year of Last Attempt 2001 749 34 43 2000 347 16 20 1999 205 9 12 1998 91 4 5 1997 or before 340 15 20 Never tried 278 13 No answer 213 9 Total 2223 100% 100% Application Method In person 1134 51 65 Phone 414 19 24 Mail/fax short form 106 5 6 Internet web site 13 1 1 No answer 65 3 4 Did not apply 1 491 21 Total 2223 100% 100%
TABLE 24 CONTINUED Pct. of Those No. of Cases Raw Pct. Who Tried Loan/Credit Line Purpose Working capital 603 27 35 Fixed assets 688 31 40 Refinance/ Pay off existing loan 164 7 9 No answer 277 13 16 Did not apply 1 491 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 25 Over $500 110 5 8 No answer 496 22 Did not apply 491 22 Total 2223 100% 100% Mean Loan Requested (000s) $240 Median Loan Requested (000s) $60 1 Includes 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. The largest (over $5 million in sales) and smallest (under $50 thousand in sales) were less likely to report not applying for a loan, as were faster growing firms. Female-owned firms, firms doing business in the finance and insurance industry, and stable/declining firms were more likely to report never trying for a loan. These owners were also asked to report the reason for not trying to get a loan and could report multiple reasons. Of the total giving some reason, 75 percent indicated that they did not need the funds, while 15 percent reported that they never borrow, and 9 percent that they expected to be turned down. The respondents who expected to be turned down more frequently owned newer firms or were female owners. 49 Credit, Banks and Small Business The New Century
TABLE 25 NON-BORROWERS BY SELECTED FIRM CHARACTERISTICS No. of Cases Pct Did Not Try All Firms 278 14 Reason (multiple responses allowed) Didn t need the funds 382 76 Never borrow 76 15 Expected 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 16 Grew 6 10 percent 65 11 Grew 11 20 percent 26 11 Grew more than 20 percent 21 11 Too new to tell 10 23 50 Credit, Banks and Small Business The New Century Industry Agriculture 16 11 Construction 40 13 Manufacturing/Mining 21 9 Transportation/Comm. 7 9 Wholesale trade 21 10 Retail trade 65 17 FIRE 25 20 Services 45 15 Professional services 22 17
TABLE 25 CONTINUED No. of Cases Pct Did Not Try. Years in Business 1 4 37 13 5 10 53 19 11 15 42 15 16 25 62 22 26 35 34 12 Over 35 37 13 Gender of Owner Male 183 14 Female 47 21 Both equally 40 10 Over 70 percent of the applicants went to a bank for their loan, followed by six percent at credit 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 institution compared to 75 percent in 1995. For those making only one application, 80 percent contacted a bank with the remainder spread over other institutions. When two applications were made, 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 percent for other financial institutions, and 9 percent went to credit unions. Seventeen (17) percent of those applying at three or more places applied to private individuals (friends, relatives, other). TABLE 26 LOAN APPLICATION ACTIVITY No. of Cases Pct. of Total Pct.Who Applied Place Applied Bank 1231 56 71 Credit Union 63 3 4 Finance Company 110 5 6 Other Fin. Inst 69 3 4 Friend, relatives 42 2 2 Other individual 22 1 1 Other 32 1 2 No answer 163 7 10 Did not apply 1 491 22 Total 2223 100% 100% 51 Credit, Banks and Small Business The New Century
TABLE 26 CONTINUED No. Pct.Who Pct.Who of Cases 2001 Pct. Applied 1995 Pct. Applied Institutions Applied One 1268 57 81 58 75 Two 143 6 12 11 15 Three 55 3 5 5 6 Four or more 60 2 2 3 4 No answer 206 10 12 Did not apply 1 491 22 11 Total 100% 100% 100% 100% 100% Type of Lender Approached Finance Credit Other Fin. Friends, Other Bank Company Union Institution Relatives Individual Other Number of Loan Application Attempts One 80% 6 4 3 2 1 2 Two 85% 13 5 10 6 1 1 Three or more 85% 16 9 12 10 7 4 Total Number of 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. 52 Credit, Banks and Small Business The New Century SUCCESS IN OBTAINING CREDIT Most owners were successful in finding a lender and obtaining credit (Table 27). Banks continued to be the predominant source of funds for 84 percent of the successful firms reporting an identifiable 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 their application was turned down, possibly after repeated attempts. However, 184 owners reported a reason for a turndown. Clearly, some owners who were turned down at least once in their search 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 at 11 percent when measured as the number providing a reason for a refusal than the seven percent figure based on those reporting a turndown. Twenty (20) percent of those who had an application turned down were told the company was too new and had no track record. Twenty-six (26) percent had too much debt; 13 percent had, in the view of the lender, poor sales prospects or industry conditions; 9 percent had weak business financials; and, 10 percent had weak personal financials. The distribution of reasons given by lenders for loan refusals varies with economic conditions. Lenders in 1987 were much more 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 for sales 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 26 percent of the reasons for a refusal in 1987 and 2001 compared to 18 percent in 1995).
TABLE 27 LOAN 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 93 Bank 1125 51 65 84 83 76 Credit Union 33 1 2 2 2 3 Finance Company 74 3 4 6 3 0 Other Fin. Inst 43 2 2 3 2 4 Friend, relatives 21 1 1 2 5 7 Other individual 17 1 1 1 2 5 Other 26 1 2 2 3 5 No source given 279 13 16 Did not apply 491 22 Total 2223 100% 100% 100% 100% 100% Reason for Turndown Survey Year 2001 1995 1987 No. of Cases Pct. No. of Cases Pct. No. of Cases Pct. Too new 37 20 134 25 44 18 Too much debt 47 26 106 20 74 29 Poor sales outlook 17 9 32 6 68 27 Poor industry conditions 7 4 29 5 17 7 Weak personal credit history 19 10 10 2 na na Weak business financial condition 16 9 72 13 24 10 Other 41 22 153 29 24 9 Total 184 100% 536 100% 251 100% Total applying 1732 3196 1522 Total approved (adjusted) 1 1548 2660 1271 Turndown rate (%) (adjusted) 11 17 16 1 Total applying minus the total number reporting a reason for a turndown. 53 Credit, Banks and Small Business The New Century
Turndowns were least frequent for owners making only one application (Table 28). Those with one application reported a denial 7 percent of the time, those with three or more applications 41 percent of the time. No consistent relationship existed between turndowns and bank size. 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 correlation 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 of a 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 firms overall). The turndown rate fell with increasing firm age and declined to 7 percent for those with firms in business 20 years or more. Turndown rates also varied widely by industry. They were lowest for service sector firms with 5 percent for professional service and FIRE and highest for those in transportation and communication (19 percent). Turndown rates also showed a strong negative association with firm size (sales, employment, assets) ranging from 16 percent for those with firms with under $50,000 in annual sales to 3 percent for those with firms of more than $5 million. In general, a higher leverage ratio (debt to equity ratio) and declining sales growth were associated with a higher turndown rate. Finally, turndown rates were much higher for female business owners (17 percent). However, this outcome was due to their firms being smaller, concentrated in the service industry, and in business fewer years than their male counter-parts. Controlling for firm differences erased the male/female turndown rate (not shown). TABLE 28 LOAN TURN DOWNS BY SELECTED APPLICATION AND FIRM CHARACTERISTICS No. Pct. of Cases Turned Down All Firms 1732 11 54 Credit, Banks and Small Business The New Century Where Applied Banks 1258 12 Finance Co. 111 15 Credit Union 66 8 Other Fin. Inst 70 8 Other (friend, etc) 96 5 Number of Attempts One 1268 7 Two 143 35 Three or more 115 41 Bank Size Small (< $100 m) 319 10 Mid ($100 $525m) 319 7 Large ($525m $5b) 275 10 Very Large ($5 $20b) 389 13 Mega (>$20 b) 242 10
TABLE 28 CONTINUED No. Pct. of Cases Turned Down Form of Business Proprietorship 427 14 Partnership 73 16 Corporation 719 10 S-Corporation 437 8 LLC 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 Sales Growth (Annual avg. last 3 years) Declined more than 5 percent 244 16 No change 494 8 Grew 6 10 percent 506 9 Grew 11 20 percent 221 14 Grew more than 20 percent 167 14 Too 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 Ratio No debt 689 10 <20% 454 9 20% 40% 248 10 Over 40% 341 14 55 Credit, Banks and Small Business The New Century
TABLE 28 CONTINUED No. Pct. of Cases Turned Down Years in Business 1 4 181 22 5 9 247 25 10 14 278 11 15 19 258 9 29 24 234 6 25 or more 485 7 Industry Agriculture 134 6 Construction 268 11 Manufacturing/Mining 211 10 Transportation/Comm. 72 18 Wholesale trade 180 6 Retail trade 326 14 FIRE 99 5 Services 264 12 Professional services 110 9 Urban Location (MSA) Yes 1049 11 No 675 9 Gender of Owner Male 1173 10 Female 178 17 Both equally 346 10 56 Credit, Banks and Small Business The New Century TERMS OF CREDIT The average loan size granted was $233,000 and the median size granted was $50,000. The average size received was $5,000 above the average loan size requested, while the median size received was $10,000 below the median loan size requested (Table 29). Forty-five (45) percent of the new loans made were fixed term loans; 27 percent were new or increased credit lines; 26 percent were a refinancing or renewal of existing loans; and 2 percent were new business credit 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. Thirty-one (31) percent were required to do their business checking at the lending institution and nine 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 agreement. Surprisingly, 21 percent of the owners reported collateral valued at over $1 million. The average collateral value was $667,000 with a median market value of $250,000.
TABLE 29 LOAN SIZE, TYPE, AND NON-PRICE TERMS FOR NEW LOANS RECEIVED Loan Received No. of Cases 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 5 No answer/turned down 375 17 Turned down 184 8 Did not apply 491 22 Total 2223 100% Mean size (000s) $233 Median size (000s) $50 Pct. Reporting No. of Cases Pct. of Total Loan Type Most Recent Loan Type NEW fixed term 632 26 45 NEW line of credit 246 10 17 INCREASED line of credit 139 5 10 RENEWAL of existing loan 253 11 18 NEW business credit card 40 1 3 REFINANCING of an existing loan 103 4 7 No answer/turned down 462 21 Did not apply 491 22 Total 2223 100% 100% 57 Credit, Banks and Small Business The New Century
TABLE 29 CONTINUED No. of Cases Pct. Reporting New Loan Loan Requirements Personal Checking 144 11 Business Checking 474 34 Collateral 811 57 Loan Fees 402 29 Origination Fee (258) (19) Commitment Fee (40) (3) No answer (104) (7) No. of Cases Pct. of Total Pct. Reporting Collateral 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 14 Over $1000 142 18 21 No answer 138 17 Total 811 100% 100% Mean Collateral Amount (000s) $667 Median Collateral Amount (000s) $250 58 Credit, Banks and Small Business The New Century The incidence of collateral by type and fees by firm size and industry classification is shown in Table 30. Business property was most frequently used for collateral (64 percent) followed by inventory (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 provided other personal assets. The use of accounts receivable as collateral rises with firm sales. In contrast, the use of the owner s private property generally declines with firm size (sales), while inventory 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 inventory 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 industry most often put up other personal real estate. The percentage of owners reporting collateral requirements rose from 48 percent for the smallest (sales under $50,000) to 77 percent for those whose firms have $5 million or more in sales. The incidence of revenue-generating requirements generally increased with the size of the enterprise. Requirements for business checking at the lending bank rose from 31 percent among owners of the smallest firms to 47 percent of those among the largest. Personal checking business was required for 14 percent of the smallest (under $50,000 in sales) compared to 10 percent of the largest firms. The incidence of loan fees showed little relationship to firm size.
COLLATERAL AND OTHER LOAN REQUIREMENTS BY SELECTED FIRM CHARACTERISTICS Type of Collateral Taken Business 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 37 Over $5,000 52 54 63 7 9 7 40 3/3/03 10:10 AM Page 59 Industry Agriculture 44 28 71 22 15 6 30 Construction 28 30 66 18 11 7 26 Manufacturing/Mining 38 38 71 15 8 6 35 Transportation/Comm. 11 19 58 14 3 17 33 Wholesale trade 58 50 61 11 6 7 37 Retail trade 52 16 54 17 9 12 27 FIRE 9 5 52 11 23 14 16 Services 23 20 64 24 11 15 26 Professional services 27 31 71 15 15 14 27
TABLE 30 CONTINUED Loan Requirements Collateral Business Personal Fees Checking Checking All 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 28 Over $5,000 77 47 10 33 Industry Agriculture 64 31 10 35 Construction 59 35 11 30 Manufacturing/Mining 68 42 10 34 Transportation/Comm. 58 30 8 25 Wholesale trade 69 40 13 28 Retail trade 65 29 7 27 FIRE 54 31 14 25 Services 60 31 11 32 Professional services 57 37 11 27 60 Credit, Banks and Small Business The New Century PRICE OF CREDIT The survey period (1998 through 2001) covered a time frame of remarkable stability in longterm interest rates coupled with dramatic swings in short-term rates. The latter was precipitated by a major shift in Federal Reserve policy from trying to tame a rapidly growing economy (Federal Funds peaked at 6.5% in early 2000) to preventing a major recession (Federal Funds bottomed at 1.75% in late 2001). In spite of this, the average rate of interest on fixed rate loans was quite stable from year to year. This change in market conditions is reflected in the average rate for fixed rate loans reported by the date of the loan. The average rate for loans received in 2001 was 8.1 percent, higher at 8.4 percent in 2000, and 8.5 percent before 2000. The overall reduction 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 percent in 1995 and 11.2 percent in 1987. The distribution of fixed rates paid showed substantial variation in 2001 with 12 percent paying under 6 percent and 23 percent paying over nine percent. These compare to less than 1 percent and 38 percent, respectively, for the same rate intervals in 1995. For owners with loans tied 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 is down considerably from 1995, when the average was 1.7 percent and from 1987 where the average spread was 1.5 percent. The decline between 1995 and 2001 may reflect the increasing competition for small firm business or the slightly older profile of the respondents to this survey compared to the 1995 survey. Though not shown in Table 31, there was no meaningful difference in the average fixed rate paid by location, bank size, or the occurrence of a merger. Owners reporting more competition for their business paid lower rates, but this could be due to the risk characteristics of these firms (see Table 9).
TABLE 31 RATE PAID ON MOST RECENT LOAN Mean Median No. of Cases (Pct.) (Pct.) Interest rate Fixed rate 748 8.3 8.0 Spread over prime 459 1.3 1.0 Spread over LIBOR 20 1.3 1.4 Spread over other 13 * * No answer 345 Did not apply/no source 638 Total 2223 Fixed Mean Rate (Pct.) Loan Year 2001 8.1 2000 8.4 1999 8.5 1998 or earlier 8.5 No. of Cases Pct. of Total Fixed rate distribution <= 5.0% 56 7 5 5.9% 36 5 6 6.9% 101 14 7 7.9% 203 27 8 8.9% 181 24 9 9.9% 102 14 10% or more 69 9 Total 748 100% *too few cases to calculate 61 Credit, Banks and Small Business The New Century
TABLE 31 CONTINUED No. of Cases Pct. of Total Prime rate spread < 0% 9 2 0.0% 78 17 0.1 0.50% 47 10 0.51 1.00% 136 30 1.00 1.50% 38 8 1.51 2.00% 114 25 >2.00% 37 8 Total 459 100% CONCLUSION What do the results of the 2001 edition of Credit, Banks and Small Business say about the state of 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 run their businesses, benefiting from the overall decline in interest rates and increased competition for their banking business since the last survey. Despite their success in acquiring credit, unhappiness 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 percent of the identified loan sources. Next largest in market share were finance companies accounting for 6 percent. All remaining credit sources accounted for only 10 percent of the loans granted. While banks were the largest supplier, smaller banks were the clear favorite of small firms. Large banks were rated uniformly lower on almost all characteristics important to a small firm s banking relationship. 62 Credit, Banks and Small Business The New Century Banking mergers had a mixed effect on small firms. Surprisingly, the occurrence of a merger did not have an effect on loan turndown rates, the average rate paid, or the incidence of collateral requirements. Although turndown rates were little different, owners of firms who reported mergers of their primary financial institution were also more likely to report that they were less able to meet all of their borrowing needs. Mergers had a strong, negative effect on fees and quality of service, with fees increasing in frequency and amount. Not surprisingly, small-business owners who did not switch banks after a merger were much more likely to actively shop for a new bank. Despite the continued pace of mergers in the banking industry, owners continued to report more competition for their business since 1995. This increase in competition resulted in a lower incidence of fees for services, improved credit availability, lower loan rates, and higher service quality, although even more competition did not prevent dissatisfaction with staff turnover.
The benefits of more competition were not distributed evenly across all small firms. Not surprisingly, larger, older firms had overall better experiences than smaller, younger firms. Femaleowned firms were less likely to use bank or trade credit and more likely to rely on credit cards. Yet, female owners did not rank their bank s performance on characteristics important to a banking relationship any worse than male-owned firms. While banks are the dominant provider of business loans, small firms relied on a variety of other sources of funds to finance their business. Both trade credit and credit cards were very important sources of financing. Credit cards were used by 84 percent of the respondents with 42 percent reporting outstanding balances. For those firms carrying balances, the average balance 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 limited, concentrated mostly with newer firms whose owners may be more comfortable with this medium. Perhaps technology will become a more important part of interacting with banks in the future, but it is little used as of 2001. 63 Credit, Banks and Small Business The New Century
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APPENDIX II TOTAL SAMPLE RESPONSE DISTRIBUTIONS 1. Over the last three years, was your firm able to satisfy its borrowing needs at all times? Percent No. of Cases Yes, all the time 48 1061 Yes, most of the time 20 449 No, seldom satisfied needs 8 167 Did not want or need to borrow 20 438 No answer 4 108 2. Over the last three years, have you noticed a change in the following characteristics of 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 acquired by another? Percent No. of Cases 68 Credit, Banks and Small Business The New Century 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
Percent No. of Cases 3a. If YES, how did the change affect you? Positively, a good thing 2 46 No effect 9 198 Minor transition problems 10 228 Negatively, a bad thing 8 165 Changed financial institutions 3 75 Too soon to judge 2 46 No answer 66 1,465 4. Over the last 12 months, has the number of services on which you pay fees: Decreased substantially? 1 20 Decreased slightly? 3 65 Stayed the same? 43 946 Increased slightly? 30 671 Increased substantially? 10 217 Don t know 6 132 No answer 7 172 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 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 5 109 No answer 58 1283 69 Credit, Banks and Small Business The New Century
6. Please check each product/service that your business currently or recently (within the 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 financial institution. How important is EACH one to you in conducting your firm s financial affairs? Very Not Important 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% 70 Credit, Banks and Small Business The New Century
8. How would you rate YOUR PRINCIPAL FINANCIAL INSTITUTION on these same characteristics? 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% Percent No. of Cases 9. What is the approximate time it usually takes to go from your place of business to your financial institution? 5 minutes or less 49 1093 6 10 minutes 25 560 11 15 minutes 12 267 16 20 minutes 5 111 21 30 minutes 3 71 31 minutes or more 2 51 No answer 4 70 10. We want to analyze bank performance as it related to the size of the bank. If you know the size of your principal financial institution in terms of assets, please check the appropriate category below. If you are not sure or don t know, please name your principal 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 11 253 Don t use a bank, use another type 1 27 No answer 8 173 71 Credit, Banks and Small Business The New Century
Percent No. of Cases 11. Have you noticed any change in the competition for your firm s financial business compared to 3 years ago? Much more competition 12 258 Slightly more competition 30 667 No change in competition 45 1008 Slightly less competition 5 103 Much less competition 4 88 No answer 4 99 12. Within the last 3 years, did you actively shop for a new financial institution? Yes 27 591 No 66 1475 No answer 7 157 12a. If YES, why? (Check ALL that apply) (Percent of total in question #12 who selected each category) Turnover in account managers 7 152 Needed more credit 6 131 Wanted better loan terms 12 257 Needed more services than offered 3 74 Lower interest rates 10 220 Needed better service 13 298 13. When is the last time you changed principal financial institutions? 72 Credit, Banks and Small Business The New Century Never changed 39 881 2001 4 82 2000 5 106 1999 5 112 1998 5 20 1997 or earlier 35 768 No answer 7 154
Percent No. of Cases 13a. What was the major reason for changing? Problems with a merger 10 211 Turnover in account managers 4 6 Inadequate credit line 4 85 Loan terms too difficult 3 69 Followed account manger to a new bank 4 84 Could not get desired loan terms/size 6 142 Treated me as a stranger 7 153 Other 14 302 No answer 48 1081 13b. At the time you changed, how did the size of your new bank compare to the one you left? Larger 13 290 Smaller 24 525 About the same size 13 285 No answer 50 1123 14. How many account managers have you dealt with at your current principal financial institution in the past 3 years? None 6 129 One 43 967 Two 33 735 Three 11 239 Four or more 4 85 No answer 3 68 15. Overall, how many BANKS does your firm use? None 1 31 One 58 1292 Two 27 600 Three 8 172 Four or more 3 75 No answer 3 53 73 Credit, Banks and Small Business The New Century
Percent No. of Cases 15a. How many of the banks you use are in your local market? None 4 87 One 49 1091 Two 25 565 Three 7 154 Four or more 8 162 No answer 7 164 15b. How many NON-BANK financial institutions (finance company, credit union etc.) does your firm use for loans, credit cards, lease financing etc.? None 46 1023 One 20 448 Two 12 256 Three 6 131 Four or more 7 160 No answer 9 205 15c. How many of these non-bank financial institutions are in your local market? None 46 1014 One 13 283 Two 4 98 Three 2 45 Four or more 3 62 No answer 32 721 15d. Does your firm do any of its banking over the internet? 74 Credit, Banks and Small Business The New Century Yes 11 244 No 83 1849 No answer 6 130
Percent No. of Cases 16. How many different BANKS (with different names) are you aware of in the market area in which your firm does most of its business? One 9 204 Two 7 161 Three 7 159 Four 9 207 Five 13 289 Six 11 249 Seven 6 120 Eight to ten 15 322 Eleven or more 6 126 No answer 17 386 17. In your last fiscal year, what were the TWO most important sources of funds to finance your WORKING CAPITAL needs? Bank loans (excluding credit cards) 50 1122 Credit cards 25 547 Finance company loans 7 143 Other loans (friends etc.) 7 153 Trade credit (from suppliers) 26 573 Earnings 54 1202 One source only 9 206 No answer 22 500 Total 200 4446 18. In your last fiscal year, what were the TWO most important sources of funds to finance CAPITAL OUTLAYS? Bank loans (excluding credit cards) 43 965 Credit cards 16 346 Finance company loans 9 200 Other loans (friends etc.) 5 110 Trade credit (from suppliers) 12 275 Earnings 43 962 One source only 18 409 No capital expenditures 19 429 No answer 34 750 Total 200 4446 75 Credit, Banks and Small Business The New Century
Percent No. of Cases 19. Do you have one or more business loans outstanding (fixed term or line of credit)? Yes 60 1330 No 35 787 No answer 5 106 19a. If YES, what is the approximate total amount currently owed on these loans? ($000s) 1 10 9 206 11 25 10 225 26 50 6 138 51 100 3 65 101 200 10 234 201 500 6 124 501 1,000 4 79 1,001 4,999 4 83 5,000 or more 1 15 No answer 47 1054 19b. Have you renegotiated the terms on any of these loans within the last 3 years? Yes 28 627 No 29 633 No answer 43 963 19c. Have you had a business loan application denied anytime in the past 3 years? Yes 7 146 No 50 1117 No answer 43 960 76 Credit, Banks and Small Business The New Century 19d. How many different lenders do you currently use? One 31 692 Two 16 353 Three 5 115 Four or more 4 83 No answer 44 980
Percent No. of Cases 20. Do you use credit cards for business purposes? Yes, card in business name 43 942 Yes, personal card 20 450 Both business and personal card 19 427 No 15 332 No answer 3 72 20a. If YES, what is the approximate total of all outstanding balances owed on these cards? ($000s) None 32 715 1 or less 12 257 1 2.9 6 141 3 5.9 9 199 6 9.9 4 80 10 14.9 4 94 15 19.9 2 40 20 24.9 2 49 25 or more 6 128 No answer 23 520 20b. How many different business credit cards and accounts do you use? None 10 218 One 36 798 Two 21 463 Three 8 170 Four or more 5 106 No answer 20 468 21. Do you have existing accounts payable (not credit card debt) owed to your suppliers? Yes 54 1196 No 40 902 No answer 6 125 77 Credit, Banks and Small Business The New Century
Percent No. of Cases 21a. Estimate the percentage of your firm s purchases (dollars, not transactions) that are made on credit. None 3 59 Under 10% 3 65 10% 19% 6 140 20% 29% 2 55 30% 39% 1 25 40% 49% 1 18 50% 59% 4 96 60% 69% 1 26 70% 79% 4 85 80% 89% 5 103 90% or more 23 504 No answer 47 1047 21b. Estimate the percentage of your firm s purchases (dollars, not transactions) that have discounts for early payment. None (0%) 11 249 5% or less 11 248 6% 10% 8 166 11% 25% 6 140 26% 50% 8 177 51% 89% 6 138 90% or more 3 68 No answer 47 1037 21c. How often do you take advantage of discounts for prompt payment when available? 78 Credit, Banks and Small Business The New Century Always 21 471 Usually 16 361 Rarely 10 211 Never 4 87 No answer 49 1093
Percent No. of Cases 22. What is your estimate of the RATIO of your total business liabilities to your total business assets? Zero (no debt, no answer) 44 988 1 10% 17 372 11 20% 9 206 21 30% 8 166 31 40% 5 106 41 50% 8 167 51 74% 7 144 75% or higher 3 74 23. Do you have any PERSONAL loans (other than a personal credit card) that were used for business purposes? Yes 20 434 No 75 1678 No answer 5 111 23a. Is the largest amount of your business s outstanding financial obligations in: Leases 8 167 Credit cards 9 204 Loans 56 1245 No answer 27 607 24. When was the last time you TRIED to get a loan (fixed term, new or increased line of credit etc.)? 2001 34 749 2000 16 347 1999 9 205 1998 4 91 1997 or prior 15 340 Never tried to get a loan 12 278 No answer 10 213 79 Credit, Banks and Small Business The New Century
Percent No. of Cases 24a. If you NEVER TRIED TO GET A LOAN, was it because (check all that apply): You didn t need the funds 17 382 Never borrow 3 76 You expected to be turned down 2 48 No answer 78 1717 24b. Where did you try to get your most recent loan and how did you apply? In person 67 1218 Phone 25 444 Mail/Fax short form application 7 120 Internet, web site 1 15 Total 100 1797 Bank 78 1404 Credit Union 4 72 Finance company 7 129 Other financial institution 4 79 Friend, relatives 3 53 Other private individual 2 24 Other 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)? 80 Credit, Banks and Small Business The New Century One 58 1282 Two 7 144 Three 3 56 Four 1 30 Five or more 1 30 No answer 30 681 24d. What was the purpose of the loan or credit line? Working capital 27 603 Fixed assets (building, land, equipment, vehicles) 31 688 Refinance/pay off existing loans 7 164 Not applicable 29 638 No answer 6 130
Percent No. of Cases 24e. What loan amount did you request? ($000s) 24f. Where did you get the loan? 1 10 7 146 11 25 10 219 26 50 10 227 51 100 10 230 101 500 14 304 Over 500 5 110 Did not Apply 22 491 No answer 22 496 Did not get the loan 5 114 Bank 50 1125 Credit Union 2 33 Finance company 3 74 Other financial institution 2 43 Friend, relatives 1 21 Other private individual 1 17 Other 1 26 No answer 35 770 24g. If turned down, what was the reason given? Too new, no track record 2 37 Too much debt, too little equity 2 47 Outlook for sales, slow growth 1 17 Poor industry conditions/ prospects 1 7 Weak personal credit history 1 19 Weak business financial condition 1 16 Other 2 41 No answer 90 2039 81 Credit, Banks and Small Business The New Century
Percent No. of Cases 25. Was your most recent loan: A NEW fixed term loan 28 632 A NEW line of credit 11 246 An INCREASED line of credit 6 139 A RENEWAL of an existing loan or line of credit 11 253 A NEW business credit card 2 40 A REFINANCING of an existing loan 5 103 No answer 37 810 26. What was the size of your most recent loan (or line of credit, line increase, or credit card limit)? ($000s) 27. Pay back period (loan maturity)? 1 10 14 303 11 25 13 296 26 50 7 161 51 100 3 62 101 200 11 248 201 500 4 96 501 1,000 3 67 Over 1,000 4 80 No answer 41 910 82 Credit, Banks and Small Business The New Century No loan, no answer 62 1401 12 months or less 8 169 13 24 months 2 51 25 36 months 5 115 37 48 months 3 56 49 60 months 9 201 61 120 months 5 104 over 120 months 6 126
Percent No. of Cases 28. What was the interest rate? Under 5% 1 33 5% 6% 4 78 7% 9% 21 461 10% 14% 5 105 15% or more 1 20 No answer 1 15 Fixed Rate Loan Total 32 712 Prime(plus) 21 459 LIBOR (plus) or other index 1 33 Variable Rate Loan Total 22 492 No answer, no loan 46 1019 Converted Interest Rate Under 5% 2 48 5% 6% 6 133 7% 10% 35 777 10%-14% 11 236 15% or more 1 29 No answer 45 1000 29. Were you required to pay a fee for the loan? Yes 21 463 No 42 943 No answer 37 817 29a. If YES, was there an origination fee? Yes 14 305 No 5 112 No answer 81 1806 83 Credit, Banks and Small Business The New Century
Percent No. of Cases 29b. If YES, was there a commitment fee for the unused portion of the line? Yes 2 45 No 15 336 No answer 83 1842 30. Was business and/or personal collateral required? Yes 41 907 No 22 483 No answer 37 833 30a. If YES, check all types of collateral that apply. Inventory 15 327 Accounts receivable 11 254 Business property/equipment 26 583 Personal residence 7 158 Other personal real estate 4 93 Other personal assets 4 94 Personal guarantee 12 264 30b What was the approximate market value of the collateral? ($000s) Under 20 3 59 20 49 4 91 50 74 2 56 75 99 2 34 100 249 9 203 250 499 7 153 500 999 5 112 1,000 or more 8 170 No answer 60 1345 84 Credit, Banks and Small Business The New Century 31. Was your business required to maintain a checking account or use other financial services at the lending institution to get the loan? Yes 24 543 No 40 898 No answer/not applicable 35 638
Percent No. of Cases 31a. Was your personal banking business required at the lending institution as a requirement of the loan? Yes 8 171 No 56 1240 No answer/not applicable 37 812 32. What is your legal form of business organization? Proprietorship 26 570 Partnership 4 97 Corporation 40 893 Sub-S corporation 24 529 Limited liability corporation 4 81 No answer 2 53 33. During your last fiscal year, what were your gross sales, net of sales taxes and other excise taxes? ($000s) Under 50 5 105 51 100 6 136 101 200 8 187 201 500 18 404 501 1,500 20 449 1,501 5,000 14 304 Over 5000 8 182 No answer 21 456 34. Which category best describes the average annual change in your gross sales over the past 3 years? Declined more than 5 percent 14 322 No change 29 637 Grew 6 10 percent 27 614 Grew 11 20 percent 12 268 Grew more than 20 percent 9 197 Too new to tell 2 49 No answer 6 136 85 Credit, Banks and Small Business The New Century
Percent No. of Cases 35. What category best describes the trend in profitability for your business over the past 3 years? Declined 20 449 Basically unchanged 29 643 Up less than 10 percent 23 522 Up more than 10 percent 21 462 No answer 7 147 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% Percent No. of Cases 37. What category best describes the total asset value of your firm at the end of your last fiscal year? ($000s) 38. How long have you owned this business? Under 50 8 180 50 99 10 214 100 199 12 274 200 499 22 493 500 999 16 353 1,000 1,999 11 233 2,000 4,999 7 161 5,000 or more 4 85 No answer 10 230 86 Credit, Banks and Small Business The New Century Under 5 years 11 239 5 10 14 315 11 15 16 354 16 25 14 317 26 35 13 280 Over 35 28 614 No answer 4 104
Percent No. of Cases 38a. In what year was the business founded? 1995 2001 14 320 1990 1994 11 253 1980 1989 26 574 1970 1979 20 440 Prior to 1970 27 590 No answer 2 46 39. How many employees do you have including yourself? 40. Is the principal owner of this business: One 7 147 2 4 29 633 5 9 25 561 10 19 17 371 20 49 12 274 50 99 4 84 100 or more 2 46 No answer 4 107 Male 65 1455 Female 12 264 Male and Female equally 19 423 No answer 4 81 Industry Classification Construction 15 341 Manufacturing 11 250 Transportation 4 85 Agriculture 7 164 Wholesale 10 220 Retail 20 441 FIRE 6 137 Services 16 342 Professional 7 147 No answer 4 96 87 Credit, Banks and Small Business The New Century
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