Bank relationships matter

May 18, 2010

In the current economic climate, many small businesses face difficulties when applying for loans. However, the process may vary depending on the business' previous relationships with financial institutions. In a recent study, Tansel Yilmazer, assistant professor in the MU Department of Personal Financial Planning, found that relationships between small businesses and financial institutions affect both the borrower's decision to apply for a loan when in need, and whether the institution approves the loan. The impact of relationships on loan rates, however, varies with the economic climate.

"The findings suggest that when in a recession, such as now, when loan rates are already low, good relationships between the business and the financial institution do not really matter," said Yilmazer. "However, when in an economic expansion, positive relationships allow loan officers to lower the loan rate."

Researchers also found that small businesses are more likely to apply for loans, and are more likely to grant if there is an existing relationship between the two. These results are unaffected by the ¬and exist during both recession and expansion years. Recently, "communication" was added to a list of criteria that lenders use to determine whether or not to grant a loan. According to Yilmazer, this further demonstrates the importance of relationships.

"Relationships are important for both businesses in need of a loan and financial institutions that are trying to attract less risky businesses," Yilmazer said. "Relationships between people capture more information than computer models."

Previous research had shown conflicting results regarding whether or not relationships affect the loan rate set by lenders. The study was conducted using data collected from the 1993, 1998 and 2003 Survey of Small Business Finances, which is funded by the Federal Reserve Board. Of these years, 1993 and 2003 were both years, and 1998 was an expansion year.

Explore further: Major loan funds Syria telecom expansion

More information: The study, "A Multistage Model of Loans and Role Relationships," was co-authored with Sugato Chakravarty from Purdue University and was published in Financial Management last December.

Related Stories

Mortgage crisis: Blame the bank?

August 27, 2008

( -- Banks have played a big role in the mortgage crisis, not only because they issued loans to suspect borrowers, but because many originated and sold bad loans to other lenders, says a University of Michigan ...

Crises lead banks to operate more opportunistically

September 21, 2009

Financial crises place significant strain on banks, causing them to behave more opportunistically than clients are accustomed to. Business clients should count on this, according to Uppsala University business economist Kristina ...

Recommended for you

How much for that Nobel prize in the window?

October 3, 2015

No need to make peace in the Middle East, resolve one of science's great mysteries or pen a masterpiece: the easiest way to get yourself a Nobel prize may be to buy one.

Search for Egypt's Nefertiti gains new momentum (Update)

September 29, 2015

The search for ancient Egypt's Queen Nefertiti in an alleged hidden chamber in King Tut's tomb gained new momentum as Egypt's Antiquities Minister said Tuesday he is now more convinced a queen's tomb may lay hidden behind ...

New finds of a living fossil

October 2, 2015

The coelacanth fish, found today in the Indian Ocean, is often called a 'living fossil' because its last ancestors existed about 70 million years ago and it has survived into the present - but without leaving any fossil remains ...


Please sign in to add a comment. Registration is free, and takes less than a minute. Read more

Click here to reset your password.
Sign in to get notified via email when new comments are made.