Small, rurally-located businesses are more likely to seek credit from similarly small financial institutions, according to a recent survey released by the Federal Reserve Banks of Richmond and Atlanta.
The report indicated that employer firms, defined as businesses with at least one employee other than the owner, that are small and based in rural parts of the country are more stable than their urban counterparts, have fewer financial challenges and rely more heavily on small banks.
“While rural small employer firms face many resource and workforce challenges, research shows they do not tend to struggle as much as their urban counterparts to find financing,” the report states. “There are a number of federal financing programs designed to increase rural access to credit, including loans, loan guarantees and grants provided by the U.S. Department of Agriculture. These programs are an asset to rural small employer firms and represent a pool of financing that urban firms cannot access. In addition, the owners of firms in rural areas tend to be older and have longer credit histories, both of which tend to be correlated with a firm’s perceived ability to repay. Finally – and of greatest consequence to the findings in this report – financial networks in rural communities are often dominated by small community banks. Researchers have found that a relationship approach to banking can be especially advantageous to small businesses and banks in rural areas, because greater social capital in these areas allows for more informed transactions.”
Sixty-two percent of rural businesses surveyed reported that they applied to small banks for credit, while 43 percent of urban businesses did. Sixty-six percent of rural business owners said that having an existing relationship with a lender was a key factor in deciding where to apply for financing.
Approximately 23 percent of rural small employer firms surveyed indicated that they were growing, compared to 30 percent of urban firms. Their lack of growth is not because of lack of success. Seven percent fewer reported experiencing financial challenges in the previous 12 months (55 percent) than urban firms (62 percent).
Stability is the main strong-suit of rural small employer firms, with 30 percent reporting to be more than 20-years-old, compared to 22 percent of urban firms that carry that distinction.
Rural small employer firms are less likely to apply for financing to expand their business and, on average, have better credit. Rural businesses were also more likely to indicate that they had sufficient financing with 51 percent reporting that they had enough financing, compared to 45 percent of urban firms.
“Rural small employer firms’ ability to access credit is partially attributable to differences in firm characteristics and the share of small bank branches in a respondent’s zip code,” the report states. “Small banks comprise a relatively larger portion of the banking sector in rural areas. When the market concentrations of small banks in urban and rural zip codes are held constant, urban and rural small employer firms received similar shares of the amount they requested.”
The report is part of a series of reports that use data from the 2016 Small Business Credit Survey (SBCS), a national data-collection effort by the 12 Federal Reserve Banks.