Intuition in Small Business Lending Decisions

Abstract

INTUITION IN SMALL BUSINESS LENDING DECISIONS Business decisions are rarely self-evident, and many of issues facing managers require more than application of standard operating procedures. Indeed, it is customary to distinguish management decision-making from operational administration by extent to which information, beliefs, policies, and values are combined into an informed judgment by a subjective process. Managers are likely to express this activity as involving a feeling, reaction,' or intuition (a felt awareness for a situation as a whole'). Intuitions seem to result from integration of disparate information, some of which is not obviously related to issue at hand. Once an intuition is formed, it can lead to conclusions about overall issue which might not have arisen from consideration of each component of situation.1 1 Tony Bastick, Intuition: How We Think and Act (Chichester. Wiley, 1982), p. 172. Commercial loan decisions involve both specific, quantifiable information and subjective, qualitative judgments. These two classes of information are often summarized as the 5 Cs of lending,' i.e., Character, Capacity, Capital, Collateral, and Conditions. Balance statements, projections, and other data about collateral and profit-ability are sought by loan officers, and objective conclusions can be drawn about state of business to be funded based on surprisingly little information, as Justis' account of borrowing procedure reveals.2 2 Robert T. Justis, Starting a Small Business: An Investigation of Borrowing Procedure,' Journal of Small Business Management (October 1982), pp. 22-31. These conclusions are usually not all that is considered when making a loan decision, however. Informal accounts and formal research studies alike suggest that bank commercial lending decisions are based in part on intuition. This is true of both small loans to small businesses and large loans to major corporations. In fact, an applicant's standing--particularly on first two C's'--is often said to depend largely on untuitive judgment of lending officer.3 According to Salisbury, Basic credit decisions are often based solely on considerations of heart (often biased), head (analytical), or gut instinct (experience). Using these guidelines, I have generally found that if my heart overrules my head, loan has almost uniformly been a poor one. If my head overrules my gutinstinct, resulting loan may sometimes be a poor one. In looking back at poor loans, I should have followed my gut instinct more often.'4 3 Len Fertuck, Survey of Small Business Lending Practices,' Journal of Small Business Management (October 1982), pp. 42-48. 4 Stephen Salisbury, Failures of My Lending Career,' Journal of Commercial Lending, vol. 67, no. 2 (1984). The results of a study of intuitive factors which enter into small business loan decisions are presented in present study. Twenty loan officers were interviewed in an attempt to explore how these intuitions affect ultimate decision to lend. METHOD The approach adopted was taken from Kelly's Personal Construct Theory.5 Kelly asserts that ways in which people perceive situations (accurately or not) are primary influences on their behavior. His technique, Repertory Grid, identifies these perceptions, together with associated feeling and intuitions held about issue in question. Kelly's theory and technique have both been used to explore management and untuitions which affect behavior in fields as diverse as quality assurance, performance appraisal, new product development, and consumer choice.6 5 George Kelly, The Psychology of Personal Constructs (New York: Norton, 1955). 6 Valerie Stewart and Andrew Stewart, Business Applications of Repertory Grid (London, England: McGraw-Hill, 1982). …

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 51 citations exist upstream.