Relationship Lending and Lines of Credit in Small Firm Finance

Posted: 17 Nov 2009

See all articles by Allen N. Berger

Allen N. Berger

University of South Carolina - Darla Moore School of Business; Wharton Financial Institutions Center; European Banking Center

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: 1995

Abstract

Explores the role of bank-borrower relationships in small firm finance. Focus is on the availability and terms of lines of credit approved by banks. Data were obtained from the U.S. National Survey of Small Business Finances conducted in 1988-89. Telephone interviews were conducted with executives from approximately 3,400 firms, of which 863 reported having lines of credit. The variables used can be classified into five categories: line of credit contract characteristics, firm financial characteristics, firm governance characteristics, industry characteristics, and information/relationship characteristics. The analysis of loan rates shows that the relationship between the banker and the borrower impacts the pricing of the loans. These results are consistent with models that hold that there is a negative correlation between loan rates and the length of the relationship between the lender and the borrower. The requirement that a firm pledge collateral is less likely for older firms who have had long relationships with the bank. Overall, the analysis shows that the longer the relationship between the banker and the borrower, the easier the loan terms are for the borrower. These findings support the proposition that bank-borrower relationships provide important information about borrower quality. (SRD)

Keywords: U.S. National Survey of Small Business Finances, Lines of credit, Bank-borrower relations, Interest rates, Bank loans, Credit, Banks, Access to capital, Interest (finance), Collateral, Firm financing

Suggested Citation

Berger, Allen N. and Udell, Gregory F., Relationship Lending and Lines of Credit in Small Firm Finance (1995). Journal of Business, Vol. 68, Issue 3, p. 351-381 1995. Available at SSRN: https://ssrn.com/abstract=1505262

Allen N. Berger (Contact Author)

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
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803-576-8440 (Phone)
803-777-6876 (Fax)

Wharton Financial Institutions Center

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European Banking Center

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Gregory F. Udell

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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