Many of the small businesses that do not apply for credit because they believe they will be denied would probably qualify for credit approvals, according to the final paper in the research compendium we’ve been reviewing over the last few weeks, entitled Small Business In Focus: Finance, released in late June by the SBA Office of Advocacy. “Who Needs Credit and Who Gets Credit? Evidence from the Survey of Small Business Finances” was written by Dr. Rebel Cole, with funding from Advocacy. Of all the research complied into this compendium, this paper is probably the most interesting and certainly the most significant contribution to the ongoing study of how and why small businesses may or may not have difficulty in accessing credit.

The small businesses are initially divided into those who need credit and those who do not need credit (nonborrowers). Then those who do need credit are further divided into firms that do not apply for credit (discouraged borrowers), those that apply and are denied credit (denied borrowers) and those that apply and are approved to receive credit (approved borrowers). Interestingly, firms identified as needing credit actually have inferior credit quality, when compared with nonborrowers, on all measures used here. Discouraged borrowers have superior credit quality over denied borrowers and actually resemble approved borrowers in many ways. However, Discouraged borrowers and denied borrowers differ from approved borrowers in one significant characteristic: they are significantly more likely to be black and female. Dr. Cole concludes from his study that policy makers can use the information in this paper to “tailor regulations to help small businesses obtain needed credit and reach their optimal credit structures.”