There is a lot of talk about small business and the need it has for credit to survive the recession. We hear that small businesses are having trouble, yet we also get news of small businesses successfully finding the credit they need. Which is it?

As part of a new report from the Small Business Administration’s Office of Advocacy called Small Business in Focus: Finance, we finally have some answers to the question of who gets credit. The study, “Who Needs Credit and Who Gets Credit? Evidence from the Surveys of Small Business Finances” (pages 94 – 133), by Rebel A. Cole of Krähenbühl Global Consulting, divides businesses into four distinct categories, each with its own characteristics:

• Non-borrowers . Those that do not need credit.
• Discouraged borrowers . Those that do not apply for credit believing that they will be denied, or for other reasons.
• Denied borrowers . Those that have applied and have been turned down.
• Approved borrowers . Thos that have applied and have been extended credit.

Theorizing that lenders are more likely to extend credit to a firm when that firm shares characteristics of other firms that historically have been most likely to repay their credits, he expected that the same set of characteristics should explain non-borrowers relative to need-credit firms and applied-for-credit firms relative to discouraged firms, as well as approved firms relative to denied firms. Studying data from the 1993, 1998, and 2003 Surveys of Small Business Finances, Cole looked at each with eye toward variables like location; age, sex, race and education of the owner; business type, credit-worthiness, years in business, and a number of other variables and what he came up with was a picture of each of the four types of business as they compare with each other.

• Need Credit vs. Non-Borrowers. Need firms are much larger as measured by sales, assets, and employment; less profitable; more highly levered; and they hold less cash. These firms are also younger and are much less likely to be organized as proprietorships and more likely to be organized as S or C corporations. Need firms have inferior credit quality on all four measures—business bankruptcy, delinquent business obligations, credit score on www.freescore.com, and trade credit paid late. Finally, need firms are significantly more likely to use both personal and business credit cards for business purposes.

• Among Borrowers: Applied vs. Discouraged. Compared with applied firms, discouraged firms are significantly smaller, more highly levered, have more cash, are less likely to be organized as corporations and more likely to be organized as proprietorships. These firms are younger and have worse credit quality as measured by firm bankruptcy, firm delinquent obligations, and D&B credit score. Discouraged firms are significantly less likely to use personal credit cards for business purposes.

• Among Borrowers: Denied vs. Discouraged. Compared with denied firms, discouraged firms are significantly smaller and more profitable. They hold more cash, are less likely to be organized as corporations and more likely to be organized as proprietorships. They are younger, less likely to use business credit cards, and less likely to pay late on trade credit. The owners of discouraged firms are more likely to be black and female. They are also more likely to have declared bankruptcy and have less personal wealth. Discouraged firms tend to use fewer commercial and non-bank sources to obtain financial services.

• Among Borrowers: Approved vs. Denied. Compared with approved firms, denied firms are significantly smaller; are more highly levered; are less likely to be C corporations and more likely to be proprietorships; are younger; and have lower credit quality as measured by business bankruptcies, firm delinquencies, D&B score, and trade credit paid late. Denied firms are significantly more likely to be located in urban areas. Owners of denied firms are significantly younger, less experienced, less educated, and more likely to be black; have significantly lower credit quality as measured by owner bankruptcy, owner delinquencies, and owner judgments; and have less personal wealth. A denied firm is significantly more likely to use a commercial bank and less likely to use a finance company when applying for its most recent loan application; has a much shorter relationship with the source of its most recent loan application; and is less likely to obtain checking, savings, and other financial services from the institution where it made its most recent loan application.

So, what can we say about the characteristics of firms that apply for and successfully receive credit? To begin with, the owners of approved firms are less likely to be black. They have higher credit quality as measured by owner bankruptcy, owner delinquencies and owner judgments. Approved firms are also significantly more likely to apply for their most recent loan at a potential source that is other than a commercial bank or savings association. They don’t use as many non-banks for financial services as other firms and are more likely to apply for a mortgages, motor vehicle or equipment loans—each of which provides collateral for the lender.

So, does that mean minority borrowers are out of luck? Not at all! The conclusions here are derived from trends seen in the data. Remember that credit-worthiness is an important factor and that many lenders use both the business credit and the personal credit of the owner when deciding whether or not to extend credit. The real conclusion is that small businesses have a set of characteristics they fall under, and both borrower (in the case of discouraged borrowers) and lenders tend to act accordingly. So, if you are looking for credit, it is time to take a long, hard look at your business, at which of the categories it falls under. Fix what you can, doing the best with what you have now, and then go for it.

For more information, visit the SBA Office of Advocacy.