03/25/2003
Most Able to Meet Financing Needs; Community Banks Favored
Banks increased their competition for small-business customers over the last three years, continuing a two-decade-old trend. At the same time, nine of 10 small-business owners were able to meet their borrowing needs, according to a new study released by the NFIB Research Foundation. The study, Credit, Banks and Small Business - The New Century, provides a generally upbeat portrayal of the small-business financing climate over the last few years.
"Competition for the small firms' banking business and the availability of loans and other financial services have been two very positive elements in the small-business economy over the last few years," said Jon Scott, associate professor of finance at Temple University, who authored the study with NFIB Chief Economist William Dunkelberg and Sr. Research Fellow William Dennis.
The study found that 42 percent of surveyed small-business owners believe competition for their banking business has increased over the prior three years compared to 38 percent in 1995. Today's level of bank interest in small business represents a vastly different climate than a little over two decades ago when just 20 percent reported increased competition. Despite the increased number of players in the small-business market, banks continue to be overwhelmingly the primary source of external capital.
One important benefit of this competition, along with favorable credit market conditions, is that over two-thirds of the owners were able to satisfy their funding needs, up from 55 percent in 1995. Small firms continue to see increases in fees, both on the number of services and the unit cost, but fewer reported increases in markets where they reported more competition for their business. Where owners reported more competition, they were also more likely to have reported improved quality of service as well as better lending terms.
"While most small-business owners rated their banks favorably on characteristics such as access to the loan officer and reliability as a source of credit - characteristics that are central to the banking relationship - community banks were typically the clear favorite of small firms," Scott said. Owners who patronize community banks are more likely to have all credit needs met, less likely to see fee increases, and rate service quality higher.
"There are also sore points that financial institutions of all size should recognize. The most frequently mentioned is the persistent turnover in bank personnel that interrupts banking relationships." Scott cautioned. Thirty percent of small-business owners reported more staff turnover at their primary financial institution while just six percent reported less. The problem is more severe for owners who experienced a bank merger or do business at a larger bank.
Other notable findings:
- Thirty-five percent of owners reported a merger or acquisition of their primary financial institution in the prior four years, up from 25 percent in the 1995 survey. The experience was associated with lower assessments of the banking relationship on virtually every criterion.
- Small business owners are not yet comfortable with much of the new technology that is part of the modern financial services industry. The study showed only 11 percent do any part of their banking business online. Just one percent filed their most recent loan application that way. EDITORS NOTE: The New Century is the sixth edition in the Credit, Banks and Small Business series. Previous editions were released in 1980, 1982, 1984, 1987, and 1995. The full text is available online at www.nfib.com.
The NFIB Research Foundation produces monthly and quarterly updates that outline the plans and opinions of small-business owners. Decision-makers at the federal, state and local levels actively monitor these reports, ensuring that the voice of small business is heard. The foundation conducts some of the most comprehensive research of small-business issues in the nation.
CONTACT: Michelle Dimarob, (202) 554-9000
