With billions on the table for struggling small businesses, new research from the University of Florida Warrington College of Business finds that community banks are a critical source for helping these businesses keep their workforce employed during the pandemic through loan access.
“Smaller community banks have traditionally been an important source of funding for small businesses,” said Christopher James, William H. Dial/SunTrust Eminent Scholar and research author. “Community banks tend to be relationship lenders, characterized by local ownership, local control and local decision making. Relationship lenders had strong incentives to make… loans in order to preserve small business relationships in the face of the massive economic downturn caused the pandemic.”
In their research, James, Warrington Ph.D. student Jing Lu and Georgetown University Ph.D. student Yangfan Sun, find that community banks were able to respond faster to loan requests from small businesses as compared to larger banks. They also find that community banks made more loans per dollar of deposits than larger banks, particularly during the early stages of the pandemic.
“Community banks tend to specialize in lending based on close personal ties between the loan officer and the small business customer,” James said. “This type of lending requires providing branch managers with greater decision rights in making lending decisions. As a result, lenders at community banks were able to respond faster when the PPP was introduced.”
Consistent with community bank focus on small business lending and their faster implementation of lending, the authors find significantly more loans per small business in counties where community banks had higher market shares. More important, the authors find that higher levels of lending are associated with significantly fewer small business bankruptcies.
Overall, James, Lu and Sun’s research finds that community banks are an important source for small businesses when crises, like the COVID-19 pandemic, arise and business owners need to secure help quickly to continue paying their employees.
