The Benefits of Firm-Creditor Relationships: Evidence from small business data

Abstract

This paper empirically examines how close ties between a firm and its creditors affects the availability and the costs of funds to the firm. We analyze data collected in a survey of small firms by the Small Business Administration. We find that the primary benefit to a firm of building close ties with a creditor is that the availability of financing increases. We find no analogous effect on the price of credit. Attempts by a firm to widen its circle of relationships by borrowing from multiple lenders increases the price and reduces the availability of credit. An increase in the amount of potential competition in credit markets appears to destabilize relationships and reduces the availability of funds. In sum, we find that relationships are valuable and appear to operate primarily through quantities rather than prices.

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