With fewer local-based banks, rural business owners often turn to relatives for loans, Texas study says

Many small-business owners in rural areas would rather ask relatives for loans, remortgage their homes, or draw from pensions than deal with the unfamiliarity of a corporate, urban bank located many miles away, according to a Baylor University study of Texas banks published in the journals Rural Sociology and International Innovation. As the number of banks continues to decrease in the U.S., leaving some rural areas without an institution, some small business owners are dealing with larger banks who don't know them on an individual basis, offer high interest rates, or reject their loans. (Small Business Trends graphic based on information from the Federal Financial Examination Council)

"Many small businesses, especially fledglings, do not have 'hard data' on earnings and credit scores to compete for loans at big, nonlocal banks," the study says. "Some interviewees reported that even when restructured local banks are familiar with individuals' 'soft data' -- such as credit history and reputation -- they are far more interested in lending to companies that will bring in large manufacturing." 

The number of banking firms in the U.S. dropped by more than half between 1984 and 2011, to fewer than 6,300, but during that time the number of branches doubled to more than 83,000, according to the Federal Deposit Insurance Corp. Many banks that closed were in rural areas, which means "that local lending to individuals based on 'relational' banking -- with lenders being aware of borrowers' reputation, credit history and trustworthiness in the community -- has dropped," the study says.

Researchers used a small sample size, interviewing 30 small business owners in rural Texas, but "the research is important because local businesses and entrepreneurs are increasingly vital for rural employment growth," said Carson Mencken, professor of sociology at Baylor. "Many rural areas lack job opportunities or have lost them, in part because rural manufacturing jobs have been exported overseas to lower-wage destinations." (Read more)