A study shows that many small businesses could qualify for credit but fail to apply because they fear they will be rejected.
Small Businesses Fit Into Four Categories
Economists and policy makers devote extensive resources to the study of small-business credit. In some of these research efforts, small businesses are assigned to different categories so that the results can be better understood. The most obvious distinction between small businesses would be as borrowers or nonborrowers. This approach would not offer the same level of detail as other categorizations, and would not provide extraordinarily useful insights.
A more refined categorization would expand on the reason that small businesses are nonborrowers. One reason could be that the business did not apply for a loan because the business did not need credit. A second type of small business would be businesses that applied for a loan, but their application was not approved by the prospective lender.
These firms can be considered separately from nonborrowers who are discouraged and do not apply for a loan because the business owner fears rejection, even though the business needs credit for its operations or expansion plans.
Discouraged Borrowers Should Apply For Credit
At least one study done by the Small Business Administration (SBA) found that discouraged borrowers were often firms that would not be approved for credit because of existing financial problems. However they also found that there were a significant number of firms that would be able to access credit, especially SBA programs that target certain small businesses, if they had applied.
This study demonstrates the importance of applying for credit. Discouraged business owners fail to apply for credit and never learn that there are resources available. It could require little effort to apply for a loan and if the loan is denied, the business owner has really lost very little relative to the large returns possible if the application is approved, including the opportunity to secure a loan and to build business credit.
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