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Small Business Loans are Profitable for Some Banks

The business case for bank loans to small businesses and the picture comes up positive!

Find green business solutions
california incentives green solutions The Small Business Administration Office of Advocacy has studied the business case for bank loans to small businesses and the picture comes up positive! You might want to know these research figures before you make your next visit to a bank for a loan.

This study investigates the contribution of relationship lending to the value of banks by estimating the market premium placed on the small business loan portfolios of banks.

The complete report is available online, but here are the high points:

  • Small business loans in the form of commercial and industrial loans with original amounts of $1 million or less add 10.5 cents to the value of a banking organization for each dollar of such loans held in the bank’s portfolio relative to larger commercial and industrial loans.
  • This value-enhancing effect emanates from the sample of the smallest banking organizations, those with assets less than $500 million.
  • The value-enhancing effect arises primarily from holdings of the smallest category of commercial and industrial loans, those with original amounts of $100,000 or less, with the differential effect for the smallest category of banks being over 28 cents per dollar of such small business loans.
  • The authors find no evidence that small commercial real estate loans, which tend to be transactional rather than relationship loans, provide a differential effect on bank value beyond that produced by commercial real estate loans more generally. However, commercial real estate loans do produce value for the smallest category of banks.

The full text of this report and summaries of other studies performed under contract with the U.S. Small Business Administration’s Office of Advocacy are available on the Internet at www.sba.gov/advo/ research.

A copy of this study is located at sba.gov/advo/research/rs301tot.pdf, and the research summary is available at: sba.gov/advo/research/rs301.pdf. Should you need further information, please feel free to contact Charles Ou at (202) 205- 6530 or advocacy@sba.gov.

Edited by Carolyn Allen
| finance | small business |

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