This story appears in the
July 2003 issue of
Entrepreneur.
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If you're like most entrepreneurs, you probably assume that
when you're seeking a loan, banks will turn you down because
your company is too small. Even if you do get a loan, you may
expect banks to set stricter loan terms for you than they would for
larger firms. But recent studies show that the size of your company
is not the most significant issue in setting bank loan
terms.
In "Do Banks Price Owner-Manager Agency Costs? An
Examination of Small Business Borrowing" (Journal of Small
Business Management, October 2002), James C. Brau looks at 463
small corporations and whether the banks they borrowed from
packaged their loans differently because of their smaller size.
Surprisingly, the banks did not charge a premium in the interest
rate due to size, nor did they require additional collateral
because the company was smaller. Instead, the interest rate charged
to smaller firms was affected by four factors: the length of the
firm's longest prior banking relationship, the number of prior
banking relationships, the length of time the firm has been in
business, and the level of annual sales. Similarly, the amount of
collateral required was closely linked to the number of prior
banking relationships and the overall debt position of the
company.
What can you learn from this? In seeking a bank loan, focus on
developing and maintaining solid banking relationships. Work with
several different banks-perhaps one for leasing, another for
financing, etc. Working closely with many banks, along with
reliable sales, will reduce the perception that your small company
is a borrowing risk.
David Newton is a professor of entrepreneurial finance at
Westmont College in Santa Barbara, California. For more journal
summaries, visit www.techknowledgepoint.com.