The Benefits of Lending Relationships: Evidence from Small Business Data

This paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm. We analyze data collected in a survey of small firms by the Small Business Administration. The primary benefit of building close ties with an institutional creditor is tha...

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Bibliographic Details
Published in:The Journal of finance (New York) 1994-03, Vol.49 (1), p.3-37
Main Authors: PETERSEN, MITCHELL A., RAJAN, RAGHURAM G.
Format: Article
Language:English
Subjects:
Bank loans
Business financing
Business structures
Commercial credit
Credit
Economic models
Financial investments
Interest rates
Investment credit
Lenders
Loan rates
Loans
Pricing policies
Regression analysis
Relationship banking
Small and medium sized enterprises
Small business
Studies
Trade credit
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Summary:This paper empirically examines how ties between a firm and its creditors affect the availability and cost of funds to the firm. We analyze data collected in a survey of small firms by the Small Business Administration. The primary benefit of building close ties with an institutional creditor is that the availability of financing increases. We find smaller effects on the price of credit. Attempts to widen the circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit. In sum, relationships are valuable and appear to operate more through quantities rather than prices.
ISSN:0022-1082
1540-6261
DOI:10.1111/j.1540-6261.1994.tb04418.x