Rural Small Businesses Hurt by Decline of Local Banks

The decline in the numberlocal banks is hurting the chance for small business success in rural communities, new research suggests. Entrepreneurs and owners of small startup businesses in rural areas must successfully pitch their ventures to "faraway, unknown banking officials" to survive, rather than rely on local lenders as in the past, researchers at Baylor University discovered.

With most bank branches now headquartered in urban areas, financial "deserts" exist in towns with few or no traditional financial institutions such as banks and credit unions. Researchers say that as a result, local lending to entrepreneurs based on "relational" banking, where lenders are aware of a borrower's reputation, credit history and trustworthiness, has dropped.

Lead researcher Charles Tolbert, a professor of sociology in Baylor's College of Arts & Sciences, said this has led many small business owners to take riskier approaches to finding funds, such as relying on relatives, remortgaging their homes and drawing from their pensions. The study found that those small business owners who do try to obtain loans from faraway banks are running into numerous difficulties. Researchers said many small businesses, especially those just getting started, do not have hard data on earnings and credit scores to compete for loans at big, non-local banks. [10 Unlikely and Surprising Kickstarter Successes]

Some of the entrepreneurs interviewed by researchers said that even when local banks are familiar with their "soft data" — such as credit history and reputation — they are more interested in lending to companies that will bring in large manufacturing jobs.

Carson Mencken, one of the study's authors and a professor of sociology at Baylor, said the research is important because local businesses and entrepreneurs are increasingly vital for rural employment growth and that many rural areas lack job opportunities or have lost them, in part because manufacturing jobs have been exported overseas to lower-wage destinations.

The study, which was recently published in the Rural Sociology and International Innovation journals, was based on application outcomes for all U.S. small business and farm loans for the past decade, as well as interviews with more than 30 small business owners in rural Texas.

The research was funded by the U.S. Department of Agriculture's National Institute of Food and Agriculture.

Originally published on Business News Daily.