Is Lending Distance Really Changing? Distance Dynamics and Loan Composition in Small Business Lending

Abstract

Much of the research on small business lending does not address the significant differences in loans or in lending institutions. If ignored, such differences might lead to incorrect or misleading inferences. Using the question of lending distance, this paper highlights how loan and lender type can drive results. Researchers studying small business lending have suggested that technological improvements are hardening the information used in underwriting loans and reducing the importance of proximity. As evidence of this trend, they have pointed to increases in average distances between lenders and borrowers. These results obscure considerable differences across loans and lenders. Using 20 years of Community Reinvestment Act data, we find that a small number of lenders, some 18 banks that focus on small dollar loans (those of \$100,000 or less), account for most of the distance dynamics. Regression results show that average lending distances for all other banks did not significantly change over the sample. Our findings imply that small businesses are still reliant on local banks for large loans, and that expansion of small loan availability to such firms from further distances arises from only a few institutions.

Keywords: Small business lending, Community Reinvestment Act, hard information

JEL Classification: R21