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

Abstract

Has information technology improved small businesses' credit access by hardening the information used in loan underwriting and reducing the importance of lender proximity? Previous research, pointing to increasing average lending distances, suggests that it has. Using over 20 years of Community Reinvestment Act data, we find that while average distances have increased substantially, distances at individual banks remain unchanged on a loan-weighted basis. Instead, average distance has increased mostly because a small group of lenders specializing in high-volume, small-loan lending nationwide have increased their share of small business lending by 10 percentage points. Our findings imply that small businesses continue to depend on local banks.

Keywords: Banking, small business lending, soft information, lending distance

JEL Classification: R21, G21, G38, L25