A recent study from Baylor University highlights the decline in local lenders in rural areas, suggesting small businesses need to seek out alternative lenders to get more business capital to fund their operations. Baylor researchers teamed up with the U.S. Census Bureau for Economic Studies to tap into the pulse of small business lending.
The study calls these rural areas financial “deserts” – towns with few or no traditional financial institutions. The trend has been building for about 30 years, as statistics from the Federal Deposit Insurance Corporation showed that the number of financial institutions in the United States fell by more than half from 1984 to 2011 to less than 6,300. However, the banks that remain have been opening new branches like wildfire, with the number of branches nearly doubling to more than 83,000.
The study, “Restructuring of the Financial Industry: The Disappearance of Locally Owned Traditional Financial Services in Rural America,” reveals a number of trends that suggest small business owners should opt for nontraditional lenders. A theme among people launching their own ventures and seeking funding is increasingly turning to relatives, refinancing their home mortgages and dipping into their pensions to get operations off the ground.
Larger, national financial institutions rely less on “relational” banking – in which smaller lenders in rural areas offer loans based on knowledge of borrowers’ reputation, credit history and trustworthiness in their community. It’s harder to earn a loan like that with a national financial institution that has more rigid rules and regulations to follow.
Small businesses are key to the U.S. economy, but even more so in rural areas that aren’t dotted with national chains like Target, McDonald’s and Jiffy Lube. Manufacturing jobs in such areas also have decreased in recent years as corporations have moved overseas, making small businesses even more key to the vitality of small towns.