Zuzana Bednarik and María I. Marshall, Personal relationships of rural small businesses with community banks in times of crisis (2024)
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Article by Zuzana Bednarik and Maria I. Marshall of Purdue University, Personal relationships of rural small businesses with community banks in times of crisis, published open access by Emerald Publishing Limited in the Journal of Small Business and Enterprise Development, received 17 May 2023 and accepted 31 January 2024. The study examines factors associated with personal relationships between rural small businesses and community bank representatives, noting that existing bank relationships became critical to getting a loan during the Covid-19 pandemic. Using an online survey in five states, factor analysis, logistic regression and interviews with bankers, the authors find that a business owner's trust in a banker was positively associated with establishing a relationship. The research was supported in part by the U.S. Department of Agriculture.
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Personal relationships of rural Business-bank
relationships
small businesses with community and crises
banks in times of crisis
Zuzana Bednarik
North Central Regional Center for Rural Development, Purdue University,
West Lafayette, Indiana, USA, and Received 17 May 2023
Revised 21 August 2023
Maria I. Marshall 21 November 2023
26 January 2024
Department of Agricultural Economics, Purdue University, Accepted 31 January 2024
West Lafayette, Indiana, USA
Abstract
Purpose – As many businesses faced economic disruption due to the Covid-19 pandemic and sought financial
relief, existing bank relationships became critical to getting a loan. This study examines factors associated with
the development of personal relationships of rural small businesses with community bank representatives.
Design/methodology/approach – We applied a mixed-method approach. We employed descriptive
statistics, principal factor analysis and logistic regression for data analysis. We distributed an online survey to
rural small businesses in five states in the United States. Key informant interviews with community bank
representatives supplemented the survey results.
Findings – A business owner’s trust in a banker was positively associated with the establishment of a business–
bank relationship. However, an analysis of individual trust’s components revealed that the nature of trust is
complex, and a failure of one or more components may lead to decreased trustworthiness in a banker. Small
businesses that preferred personal communication with a bank were more inclined to relationship banking.
Research limitations/implications – Due to the relatively small sample size and cross-sectional data, our
results may not be conclusive but should be viewed as preliminary and as suggestions for future research.
Bankers should be aware of the importance of trust for small business owners and of the actions that lead to
increased trustworthiness.
Originality/value – The study extends the existing knowledge on the business–bank relationship by
focusing mainly on social (instead of economic) factors associated with the establishment of the business–bank
relationship in times of crisis and high uncertainty.
Keywords Business–bank relationship, Small business, Rural, Crisis, PPP loan, Community bank
Paper type Research paper
1. Introduction
Rural small businesses play an essential role in the prosperity and revitalization of the rural
economy and social well-being. Their pre- and post-disaster financial health represents a
crucial aspect affecting a business’s resilience and recovery. An indicator of financial health
© Zuzana Bednarik and Maria I. Marshall. Published by Emerald Publishing Limited. This article is
published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce,
distribute, translate and create derivative works of this article (for both commercial and non-commercial
purposes), subject to full attribution to the original publication and authors. The full terms of this licence
may be seen at http://creativecommons.org/licences/by/4.0/legalcode
The authors acknowledge the partnership with Hoosier Heartland Indiana Small Business
Development Center. This research was funded by Purdue University as part of AgSEED Crossroads
funding to support Indiana’s Agriculture and Rural Development. This research was supported in part by
the U.S. Department of Agriculture, National Institute of Food and Agriculture grant award number 2021-
51150-34732. The findings and conclusions of this publication have not been formally disseminated by the
Journal of Small Business and
USDA and should not be construed to represent any agency determination or policy. Enterprise Development
The authors declare that this manuscript has not been published and is not under consideration for Emerald Publishing Limited
1462-6004
publication elsewhere. The authors have no conflicts of interest to disclose. DOI 10.1108/JSBED-04-2023-0196
JSBED that can lead to long-term small business disaster recovery is access to financial resources
(Hiramatsu and Marshall, 2018). Banks, particularly community banks, play a key role in
providing rural small businesses with the financial resources needed during times of crisis.
In fact, Marsh (2015:195) states that “community banks remain important to consumers who
prefer the relationship-banking model” and “community banks are particularly important to
small businesses, farmers, commercial real estate owners, and individuals.” Relationship
banking is specific for community banks in rural areas as they tend to be more involved in the
local community, including the business community. These close social ties enable rural
banks to obtain high quality and quantity of soft information about small businesses. This
soft information may effectively help lenders make informed decisions about the riskiness
and quality of the borrower and decrease the probability of loan default (Berger et al., 2014;
DeYoung et al., 2019; Petach et al., 2021).
The strong interlinking of rural small businesses with their communities became even
more critical during the Covid-19 pandemic. Businesses faced an unprecedented economic
disruption due to the Covid-19 outbreak (SBA, 2020), and many small businesses sought
financial relief through the Coronavirus Aid, Relief and Economic Security (CARES) Act’s
programs. The relief options included Paycheck Protection Program (PPP) forgivable loans to
help keep a business’ workforce employed, Economic Injury Disaster Loans (EIDL) to help
businesses experiencing revenue loss, the Shuttered Venues Grant, the Restaurant
Revitalization Fund and the U.S. Small Business Administration (SBA) debt relief.
In this article, we focus on PPP loans as an example of how a business–bank relationship
increases access to financial resources. PPP required a relationship with a banking institution
eligible to provide SBA loans. Not only did small businesses have to have a relationship with
SBA loan-eligible banks, but they may have found the payroll expenditure difficult to
calculate for their financial institutions, which, based on the PPP program fee structure, had
little incentive to help them (Harrington, 2020).
Harrington (2020) points out that businesses with existing bank relationships were more
likely to access PPP funds quickly and efficiently. For example, local community banks were
able to expedite small business loans at faster rates than large national banks such as Bank of
America or Chase. Various studies connect relationship banking with increased borrowing
activities and improved access to capital (e.g. Petersen and Rajan, 1994; Gill and Wilson,
2021). The interrelatedness of rural small businesses and community banks is an important
aspect of achieving business and community prosperity. Thus, the objective of this article is
to evaluate how trust in a community bank, satisfaction with a community bank’s interaction,
and preference for personal communication with a bank are associated with the development
of the personal relationships of small business owners with community bank representatives.
To achieve our objective, we applied a mixed-method approach. We conducted an online
survey in five states in the United States: Indiana, Michigan, Ohio, Kentucky and Illinois.
We used principal factor analysis and logit regression analysis to estimate the social aspects of
the business–bank relationship and the probability that small business owners would have a
personal relationship with a community bank. We split these factors into three groups –
characteristics of a business–bank relationship, business characteristics and business owner
characteristics. The qualitative component of our research included face-to-face key informant
interviews with community bank representatives that supplemented the survey results.
The study contributes to the existing literature on business and community development,
especially in times of crisis. In addition, the study adds to the existing knowledge around the
factors that may influence the development of a personal relationship between small business
owners and community bank representatives. We conclude that trust in a community bank,
satisfaction with a community bank’s interaction and preference for personal communication
with a bank might assist in a business owner’s decision to create a relationship with a
community bank. Our results may facilitate efforts of rural small businesses, bankers and
policymakers to develop relationships that provide the flexibility for adapting to a disaster Business-bank
such as the Covid-19 pandemic. relationships
The article is structured as follows. In Section 2, we focus on a literature review and
theoretical grounding regarding perceptions about a business–bank relationship. In Section 3,
and crises
we introduce the study area, data collection and research methods used to identify factors
associated with small business–bank relationships. In Section 4, we describe the variables
included in the model to test our hypotheses. We present quantitative and qualitative results
and discuss how the characteristics of a banking relationship and small businesses may be
associated with the creation of a business–bank relationship in Section 5. We also acknowledge
the study limitations in this section. Finally, in Section 6, we summarize our findings and
highlight the business-related implications of banking relations in times of crisis.
2. Literature review
In the first part of the literature review, we focus on a brief description and comparison of two
types of banking institutions - large and community banks. In the remaining sections, we
concentrate on key perceptions of a business–bank relationship together with the
characteristics of a business–bank relationship, small business characteristics and
business owner demographics.
2.1 Large banks versus community banks
The primary purpose of financial organizations is to provide a wide variety of lending,
investment and deposit products. Different financial institutions exist to serve a diverse
clientele. Some institutions focus on providing accounts and services for the general public,
while others serve clients with more specialized needs.
Large banks are defined as banks with at least $10bn in total deposits, while small banks
are those with less than $10bn in total deposits (Wiersch et al., 2022). Community banks are
defined by the Federal Deposit Insurance Corporation as those of limited size and geographic
scope that provide traditional banking services to their local communities. In general, these
banks obtain most of their core deposits locally and make most of their loans to local
businesses (FDIC, 2012).
Community and large banks offer similar financial products and services, including bank
accounts, credit and debit cards and personal and business loans. Still, there are several
significant differences between these two financial institutions. Large banks are, in general,
well-established banking institutions offering a diverse portfolio of financial products and
services to individuals and different-sized businesses and institutions. They typically serve
larger geographic areas and possess an extensive network of ATMs and physical branches
nationwide and worldwide. Unlike large banks, community banks often offer a limited
number of products and services. However, the Small Business Credit Survey conducted by
the Federal Reserve Bank revealed that applicant firms were continuously more satisfied
with their experience at small banks compared to large banks, finance companies or online
lenders between 2018 and 2021 (Wiersch et al., 2022).
Community banks represent a crucial source of funding for small businesses as they offer
them various loan products and services. They are more tied to the communities they serve
and provide more personalized, relationship-based banking services requiring local
knowledge, more frequent personal contact, individual analysis and continued
administration (FDIC, 2020).
Community banks are successful providers in areas experiencing a population inflow and
related local small business boom. Nevertheless, community banks can also meet the financial
needs of less economically vibrant areas, including rural areas with population outflow and
JSBED locations where employment is concentrated in small establishments dependent on
community banks’ financing (FDIC, 2020). The limited products and services can be
outweighed by the faster local approval process compared to a more complicated loan
approval committee in a larger bank.
2.2 Defining a business–bank relationship
A personal relationship with a bank is one of the most important relationships a business
owner has. A business–bank relationship can be defined as a social relation (Fiske, 1992)
where a business owner chooses to share information or expand activities with a bank.
In return, a banker offers products and services designed to help the business owner run the
business (Carter et al., 2007; Cole et al., 2004). This relationship represents more than repetitive
actions and requires mutual respect and knowledge (Barnes, 2003). This statement is
reinforced by Tyler and Stanley (1999), revealing that business bank customers often
consider relationship banking and the delivery of bank services as the same thing. Banks also
proactively build long-term relationships and improve their product portfolio to gain new
customers. This service is called relationship marketing and underlines the importance of
close social relationships between a lender and a borrower (Haubrich, 1989; Johnson
et al., 1996).
Research into a business–bank relationship reveals that a stronger relationship is
associated with better credit availability, more favorable collateral requirements, easier
access to loans, more favorable interest rates and lower fees (Petersen and Rajan, 1994; Kano
et al., 2011; Berger et al., 2014; Gill and Wilson, 2021). Bank managers can provide a business
owner with contacts to potential suppliers, customers or funding resources (Dyer and
Nobeoka, 2000). Rosenfeld (2014) finds that a strong relationship increases the likelihood of
moderately financially distressed firms succeeding in getting a loan.
Developed relationship lending also overcomes information asymmetry and increases
familiarity with a client (Perry and Coetzer, 2009). Lenders can use “soft information” about the
borrower when enough hard information is unavailable to make informed decisions about a
firm’s potential riskiness (Berger and Udell, 2002; Brown and Zehnder, 2007). Developing bank
connections as a social relationship can also be one of the options to relieve costly self-
monitoring, as many well-established businesses are open to revealing their “soft” information
to a banker to minimize problems associated with credit rationing (Gill and Wilson, 2021).
In the following sections, we introduce factors that have been found to be associated with a
business–bank relationship. We split these factors into two groups – characteristics of
a business–bank relationship (preferred way to communicate with a bank, trust and bank’s
interaction with a business owner) and business and business owner’s characteristics (loan
history, legal structure, family business, business activity, number of employees, years of
experience, gender and educational attainment).
2.2.1 Business–bank relationship characteristics. Essentially, the effectiveness of a
business–bank relationship depends on the degree of trust between all network
participants, including competitors. Trust contributes to eliminating risk within the
network. As such, it is a fundamental factor that defines the strength of the links and the
long-term viability of the ties between the various parties. An extensive social dialogue
between trading partners is important in creating high levels of trust (Ratnasingham, 1998;
McGowan et al., 2001; Howcroft et al., 2007). In contrast, limited in-person interactions
decrease the level of trust (Bhattacharya et al., 1998). In this context, Hansen (1995) describes a
relationship among the members of the entrepreneur’s network as a social structure and their
interaction as a social process. Reciprocal trust between a banker and a business owner
enables a bank to access soft business information (McCabe et al., 2003), reduces information
asymmetry and secures the quality of the social bond (Ferrary, 2003), decreases the number of
discouraged borrowers from applying for a loan (Tang et al., 2017) and reduces the chance of Business-bank
switching to an alternative bank (Saparito et al., 2013). Entrepreneurs who believe that a relationships
banker trusts them are more likely to behave in a reliable and honest way (Howorth and
Moro, 2006).
and crises
Mayer et al. (1995) refer to three distinct characteristics of a trustee’s (a banker in our
study) trustworthiness: ability, benevolence and integrity. The ability to accomplish the task
consists of aspects such as skills and competencies that are often task and situation-specific.
It means that attributes of the ability itself do not make a banker a trusted person.
Benevolence means the extent to which a trustee is willing to improve the relationship
between a bank and a business owner (a trustor) through positive actions, such as community
involvement. Integrity extends competencies and relationship perception of a positive
orientation towards the business owner, and it is especially important in the early stages of
relationship development. In the small business–bank relationship, it can be perceived by the
rather intrinsic nature of having the best interest of a business in mind, sharing common
values or listening to a business owner’s concerns and problems.
Different scholars studied satisfaction with the business–bank interaction and the bank’s
knowledge of a business (e.g. Haines et al., 1999; Madill et al., 2002). Saparito et al. (2009) show
that trust and bank knowledge about a firm are largely and significantly positively
correlated. Community banks especially receive high satisfaction ratings for their
performance in meeting financial needs and maintaining strong banking relationships
(Scott, 2004). If small business owners are dissatisfied with the advice and support provided
by a bank, they tend to reduce their use of bank services or switch to another bank (Perry and
Coetzer, 2009).
The Internet and various online platforms offer a new form of business–bank interaction.
As a result, the social aspect of a personal relationship is partially or fully replaced with
remote relationships and online trust (Gillen et al., 2000). Yet, bank clients can decide to utilize
remote or personal interaction based on their individual attitudes toward technology.
Customers who feel more comfortable using online technology may choose this option. Bank
clients who prefer traditional personal relationships may eliminate or reject online banking
(Thornton and White, 2001). Nevertheless, Gilbert and Choi (2003) claim that online banking
needs to be considered an inevitable reinforcement of a business–bank relationship. However,
the findings of Howcroft et al. (2007) indicate that small business owners are reluctant to
accept Internet banking fully. The Internet also impacts relationship banking and the
customer’s satisfaction with a business–bank relationship because small business owners
consider the Internet an essential component of the relationship (Howcroft et al., 2007). Later
research shows that small businesses adjusted to Internet banking and enjoyed using this
relatively new bank product (e.g. de la Torre et al., 2010).
The literature about relationship banking provides a wide variety of elements important
for the development of a personal business–bank relationship. However, as shown in
previous studies, interpersonal trust is considered a fundamental element of relationship
banking and, in turn, is even more important in times of crisis and uncertainty. As the timing
to make small business funding available was critical in 2020, PPP loans were distributed
through banking institutions eligible to provide SBA loans. Due to the first-come, first-serve
nature of the program, an existing personal relationship with an eligible bank became crucial
for a successful PPP loan application for small business owners (Hubbard and Strain, 2020).
Therefore, we asked the question: does trust as a complex construct contribute to establishing
new or improving an existing business–bank relationship? We dived deeper into the trust
components using a model by Mayer et al. (1995) that introduces three factors of perceived
trustworthiness (ability, benevolence and integrity). Based on the reviewed literature, we
tested trust in a banker as an aspect of establishing a personal business–bank relationship
and tested the following hypotheses:
JSBED H1. Business owner’s trust in a community bank is expected to have a positive
association with the development of a personal business–bank relationship.
We tested decomposed trust with two additional hypotheses:
H1a. Business owner’s satisfaction (as a proxy for ability) with banker’s interaction,
knowledge of their business and local market/community are expected to have a
positive association with the development of a personal business–bank
relationship.
H1b. Business owner’s perceived aggregated benevolence and integrity in a banker are
expected to be positively related to developing a personal business–bank
relationship.
Another crucial aspect of relationship banking is how a client interacts with a bank. Because
a business owner can decide whether to utilize remote or personal interaction based on their
preferences, it poses the question: What kind of interaction with a bank may evoke a
business–bank relationship? Thus, we tested the following hypothesis:
H2. In-person communication with a bank is expected to have a positive association with
the development of a personal business–bank relationship.
2.2.2 Business and business owner characteristics. Loan history represents another aspect of a
business–bank relationship and the closeness of a borrower to a lender. Peterson and Rajan
(1994) indicate that the smallest businesses have 95% of their loans from a single lender,
compared to 76% of the largest businesses. Businesses tend to concentrate their borrowing
from one source, but the concentration decreases as the size of a business increases. Many
factors attributed to business heterogeneity impact the loan acceptance rate - financial
history and performance, stage of business development, age of firm (Haines et al., 1999),
friendly environment and loan manager behavior (Tang et al., 2017) and business and bank
location (DeYoung et al., 2019). Thus, exploring whether a small business owner has a bank
loan is an essential indicator of a potential strong business–bank relationship.
Research findings on gender differences in loan and credit accessibility and use vary
based on data used, location, country and other aspects. As the number of female-owned
businesses grows, research related to the characteristics of female entrepreneurs is of central
interest. Several research studies show that female-owned businesses do not experience
differences in bank lending practices, credit and loan acceptance rates and credit terms
compared to male-owned businesses (Orser et al., 2006; McKechnie et al., 1998). Haines et al.
(1999) do not support a gender bias as they find that male and female entrepreneurs do not
differ substantially in terms of bank credit (such as interest rates or amount of collateral),
financial characteristics and nonfinancial attributes.
However, other studies show evidence that female-owned businesses must pledge
collateral more often (Calcagnini et al., 2015), are charged higher interest rates and have to
provide greater collateral than male-owned businesses (Coleman and Robb, 2009). Bellucci
et al. (2010) find the likelihood that female entrepreneurs need to provide collateral is 5.2%
higher than for male borrowers, although they do not pay higher interest rates. As a result,
women may become discouraged borrowers not entering the credit market. They tend to be
less confident than men due to the perception their applications would be declined (Kon and
Storey, 2003; Tang et al., 2017). Carter et al. (2007) suggest that bank managers act in a
discriminatory manner while assessing female business owners’ loan applications.
Women more often launch businesses in slower-growing service and retail industries.
At the same time, men prevail in manufacturing, construction and faster-growing high-
technology sectors (Miskin and Rose, 1990). Retail and services are often considered relatively
risky, which can be negatively reflected in bank loan accessibility and loan conditions (Haines
et al., 1999). Female-owned businesses also tend to have less structured legal forms with a Business-bank
lower share of partnerships or limited liability companies that might prevent them from relationships
accessing bank loans (Belluci et al., 2010). Female-owned businesses are, on average, smaller
and younger than male-owned businesses, which results in a shorter business–bank
and crises
relationship (Haines et al., 1999; Calcagnini et al., 2015).
The age of a business owner or manager is often used as an alternative for business
experience (Bates, 1990). Moreover, according to several studies (Dries and Swinnen, 2010;
Jonson, 2002; McMillan and Woodruff, 1999), business experience positively affects access to
credit. Gill and Wilson (2021) show that bank connections are positively correlated with
owner education.
In general, family businesses often prefer to dispose of their own financial resources.
Many of them also have family bank connections that contribute to their improved business
performance (Gill and Wilson, 2021). Moreover, family-owned businesses might have a
stronger relationship with their main bank (Berger et al., 2014).
The size of a borrowing firm may affect a business–bank relationship from different
perspectives. Small businesses are less likely to deal with multiple banks (Perry and Coetzer, 2009).
Small business lending is often based on informational asymmetries between lender and borrower
that may impact the types of lenders and lending technologies used by a lender (Berger et al., 2014;
DeYoung et al., 2019; Petersen and Rajan, 1994). Information asymmetries can be amplified as
small businesses are less likely to be monitored by rating agencies (Petersen and Rajan, 1994), and
their financial statements are unlikely to be compiled or audited by a professional accounting firm
(Allee and Yohn, 2009). Larger-sized businesses have stronger negotiating power and are usually
considered less risky than smaller businesses (Berger and Udell, 2002).
A business–bank relationship may differ according to the business and bank location.
DeYoung et al. (2019, p. 100) suggest that “the advantages associated with relationship-based
lending are likely to be more pronounced in rural places, where personal relationships are an
integral part of the social fabric.” Rural loans also have about an 11% lower probability of
default (DeYoung et al., 2019). Larger distances, typical for rural areas, separate firms from
lending branches and are considered a negative factor for credit access (Bellucci et al., 2010).
From the bank’s perspective, it is more challenging to assess borrowers located far from a
bank (Hauswald and Marquez, 2006). At this moment, the role of local bank branches is even
more important as they can collect soft information about their borrower and pass it to the
bank’s headquarters. This scenario saves transportation costs but also makes it difficult to
maintain this soft information while passing it to its final place for consideration (Stein, 2002).
Existing personal relationships with community banks may enable easier access to
capital. As relationship lending is an essential component of financial stability, particularly
among rural, small and new businesses, the presence of community banks is a fundamental
aspect of regional economic development. Petach et al. (2021) point out differences in the
geographic dispersion of community banks and emphasize the high levels of community
banking activities in rural Midwestern counties. Rupasingha et al. (2019) found that small
businesses located in counties with more bank services are less likely to fail and that
businesses in rural counties have a higher chance of survival than businesses in metro
counties.
3. Materials and methods
To test our hypotheses, we applied a sequential mixed-method approach using quantitative
and qualitative methods. We began with a quantitative survey focused on a sample of small
business owners to collect data for our analysis. We continued with a qualitative method
involving face-to-face key informant interviews that complemented the survey results
(Creswell and Creswell, 2018).
JSBED 3.1 Small business online survey
In the quantitative research component, we investigated the most critical factors associated
with the personal relationships of business owners with community bank representatives.
We targeted the survey towards small business owners in rural areas in five Midwestern
states: Indiana, Michigan, Ohio, Kentucky and Illinois. Following the USDA-Economic
Research Service, we define rural areas as nonmetro areas that include open countryside,
rural towns (places with fewer than 2,500 inhabitants) and nonmetropolitan urban areas
(urban areas with populations between 2,500 and 49,999 that are not part of metropolitan and
larger labor market areas) (ERS, 2022).
We aimed to gather at least 200 valid responses to ensure our sample size was big enough
for the logistic regression analysis. Although SBA defines small businesses as firms with
fewer than 500 employees, according to U.S. Census Bureau data, only 18% of businesses had
more than 20 employees, and 80% had no paid employees (SUSB, 2018). Therefore, in this
study, we consider small businesses as businesses with up to 20 employees.
We designed an online survey using Qualtrics comprised of four sections, including
questions regarding a business–bank relationship, loan experience, business demographics
and personal characteristics. We describe a personal business–bank relationship as a
relationship involving repeated contact between a business banker and the business owner.
A business owner chooses to share information or expand activities with a bank. In turn, a
banker offers products and services designed to help a business owner run the business.
We applied two different strategies of respondent identification and survey distribution to
guarantee the required sample size and to avoid the potential selection bias. We used random
stratified sampling and panel data collection conducted by the QualtricsXM company.
The first strategy was to conduct a survey only in Indiana. To avert the potential selection
bias, we applied random stratified sampling to extract 3,000 emails using the D&B Hoovers
database [1]. We identified the number of emails in each of the ten Indiana Small Business
Development Center’s (ISBDC) regions based on a share of the state population in each region
and estimated the number of companies per ISBDC region. As we primarily focused on rural
businesses, we avoided large metropolitan areas like Indianapolis. Then, we assigned 25% of
3,000 businesses to manufacturing industries (NAICS 31–33) as manufacturing, in general,
accounts for a quarter of jobs and state GDP in Indiana. Subsequently, we divided the
remainder of the establishments into two groups, NAICS 21–48 (Mining, Construction, Trade,
Transportation) and NAICS 51–81 (Services). We limited the employee size to a maximum of
20 employees. The majority of emails involved contacts of the business executives, owners or
managers, and the email type was campaign verified. Wherever feasible, we also downloaded
direct mailing addresses. We did not target farmers (as their activities and lenders are often
too different from non-farm small businesses) and governmental organizations. Being aware
of the potential non-response bias, we distributed the survey three times in 7-day intervals
and replaced bounced-back emails, representing about 7% of distributed emails, using the
same procedure described above. Despite our best efforts, the total number of valid responses
was only 97.
As we did not gather enough valid responses, we decided to implement the second
strategy and contracted QualtricsXM to collect the remaining data for us [2]. The company
targeted rural businesses in Indiana and surrounding border states (Michigan, Ohio,
Kentucky and Illinois) to collect 104 valid responses. We identified the sample as owners of
small businesses with up to 20 employees located in rural areas, not farmers. QualtricsXM
distributed the online survey and collected responses in the spring of 2022 [3]. In compliance
with the Institutional Review Board’s protocol, the data collected were strictly anonymous to
ensure the confidentiality of responses. The final sample consists of 201 valid responses, with
64% of small businesses located in open countryside and rural towns and 36% in
nonmetropolitan urban areas.
3.2 Interviews with community bank representatives Business-bank
Qualitative topical interviews enabled us to explore how bank representatives perceived the relationships
personal business–bank relationship. We used the face-to-face key informant interviews with
community bank representatives using open-ended questions to learn more about the motivation
and crises
and implementation of a business–bank relationship in practice and supplement the survey results.
We designed our interviews to achieve the credibility of our qualitative research through its
transparency, consistency and communicability (Rubin and Rubin, 1995). In addition, the interviews
were intended to increase the reliability of the previous analysis by including an open-ended
question about maintaining existing and generating new relationships with small business owners.
Study collaborators from rural Hoosier Heartland ISBDC helped us identify community
banks and create a list of potential key informants. We targeted the invitation list because we
were addressing community bank representatives who could provide us with their
observations and opinions on business–bank relationships from the perspective of
community banks. We distributed interview invitations to community bank
representatives – primarily bank directors – across the Hoosier Heartland Region using
email addresses from a generated list of potential key informants. Three directors of different
community banks gave their consent to be included in the study. We did not connect their
names with anything they said to protect the bankers’ privacy. This precaution also prevents
the possibility of linking the banker with their clients – small business owners.
An experienced team member conducted the interviews in the interviewee’s preferred
location. All three interviewees were asked the same open-ended questions to guarantee a
relevant level of consistency. Each interview lasted between 70 and 90 min, depending on the
informant’s volubility and information content. The interviewer followed the interview
protocol and asked additional questions only to garner the necessary information.
The interviewer started the interview with an introduction and reading ground rules
regarding confidentiality and voluntariness. After that, the interviewer asked open-ended
questions focused on:
(1) The interviewee’s professional background and experience with a market. Can you
tell me a bit about your work in general and your work and experience concerning a
small business–bank relationship? What is your bank’s geographic market for small
business loans?
(2) Small business loans. What loan products does your bank offer to small businesses,
and where can a small business apply for a loan?
(3) Maintaining existing and generating new relationships with small business owners. How
does your bank maintain existing relationships with small businesses? How does your
bank generate new relationships with small businesses? What are the needs and
expectations of small business owners/managers and bank managers actively involved in
the relationship? What is the preferred way to communicate with your established clients?
To ensure transparency and transcript availability, the interviewer recorded all interviews.
The third-party vendor, rev.com, generated the transcripts of the interviews using artificial
intelligence (a machine-generated transcript). We treated transcripts as memory aids
bolstering the interviewer’s notes to ensure an accurate representation of what was said, not
by whom. We used the precise quotations of interviewees’ firsthand experiences to give
legitimacy to our arguments resulting from the quantitative analysis.
3.3 Logistic regression model
Logistic or probit regression analysis is often applied in business–bank relation studies to
identify factors affecting a decision-making process related to a business–bank relationship
JSBED (Peterson and Rajan, 1994; Berger et al., 2014; Kano et al., 2011; Gill and Wilson, 2021). We
employed binary logistic regression analysis to estimate the influence of the following
variables on the existence of a business–bank relationship: trust in a community bank,
satisfaction with a community bank’s interaction and a preference for personal
communication with a bank. Table 1 provides a summary of variable definitions.
Question Answer options
Dependent variable
Bankrelation As a business owner, do you have a personal 1 - A company has a personal
relationship with your banking institution for your relationship with a community
business? bank
0 - Otherwise
Independent variables
Business–bank relationship
ability1 Satisfaction with the bank’s interaction (the ability to 1 - Satisfied
talk with the business owner or manager) 0 - Otherwise
ability2 The bank’s knowledge of your business 1 - Satisfied
0 - Otherwise
ability3 The bank’s knowledge of the local market/community 1 - Satisfied
0 - Otherwise
ability4 The bank’s anticipation of a small business owner’s 1 - Satisfied
financial needs other than credit/loan 0 - Otherwise
ben_int1 We trust that our bank has our best interests in mind 1 – Agree
when they give us recommendations 0 - Otherwise
ben_int2 We can freely share concerns and problems about our 1 – Agree
company and know that they will respond 0 - Otherwise
constructively
ben_int3 We share common business values with the bank 1 – Agree
0 - Otherwise
Bankcomm What is a preferred way to communicate with your 1 - Personal
bank? 0 – Hybrid or e-banking
Business characteristics
Bankloan Please indicate what borrowing patterns you have with 1 - Bank loan or line of credit
your banking institution 0 - Otherwise
Legalform What is the legal structure of the business? 1 - Sole owner/sole proprietor
0 - Otherwise
Familyowned Is the business a family business? 1 – Yes
0 - No
Femaleowned Is the business a female-owned business? 1 – Yes
0 – No
Busactivity What is the primary activity of the business? 1 – Industry
0 – Services
Employees How many employees did the business employ in 2020? Continuous
Business owner characteristics
Experience How many years of experience do you have in your Continuous
current industry?
Education What is the highest degree or level of school you have 1 - Grade 12 or GED and less
completed? 2 - College 1 year to 3 years
Table 1. 3 - 4-year college graduate and
Summary of variable higher
definitions Source(s): Created by authors
4. Variable description Business-bank
4.1 Dependent variable relationships
The dependent variable bankrelation indicates the respondent’s answer to the question, “As a
business owner, do you have a personal relationship with a community bank for your business?”
and crises
Fifty-four percent of respondents reported they have a personal relationship with a
community bank. Forty-six percent of respondents indicated otherwise. The response
“Otherwise” includes a personal relationship with a large/national bank or another type of
banking institution (especially credit unions) and businesses that do not have a personal
relationship with a bank.
4.2 Independent variables
4.2.1 Trust and trust components. We tested hypotheses H1, H1a and H1b – the effect of trust in
a community bank and its factors - by applying the three components of trust (ability,
benevolence and integrity) proposed by Mayer et al. (1995). We identified seven aspects that
determine diverse aspects of trustworthiness. We measured ability through questions about
satisfaction with a community bank’s interaction (Scarpi and Visentin, 2015; Saparito et al.,
2013) using a 5-point Likert scale (where 1 5 not at all satisfied, 2 5 slightly satisfied,
3 5 moderately satisfied, 4 5 very satisfied, 5 5 extremely satisfied). Respondents rated the
following satisfaction-related questions: (1) the bank’s interaction with a business owner or
manager; (2) the bank’s knowledge of the client’s business; (3) the bank’s knowledge of the local
market/community and (4) the bank’s anticipation of a business owner’s financial needs other
than credit/loan. The survey did not include enough questions related to benevolence and
integrity to analyze them separately, so we aggregated relevant questions into a 3-item scale
variable ben_int. We measured benevolence/integrity using a 5-item index measure (Saparito
et al., 2013; Howcroft et al., 2007) that we adjusted to the purpose of our study. Small business
owners used a 5-point Likert scale (where 1 5 strongly disagree, 2 5 somewhat disagree,
3 5 neither agree nor disagree, 4 5 somewhat agree, 5 5 strongly agree) and rated the
following statements: (1) we trust that our bank has our best interests in mind when they give us
recommendations; (2) we can freely share concerns and problems about our company and know
that they will respond constructively and (3) we can share common business values with the
bank. The pairwise correlation coefficients were between 0.295 and 0.688, showing that ability
and benevolence/integrity variables were significantly positively correlated (Table 2).
We employed the methodology used in previous lending relationship studies (Moro and
Fink, 2013; Howorth and Moro, 2012), and tested how ability (a proxy for satisfaction) and
benevolence/integrity-related variables might impact the willingness to develop a banking
relationship. In contrast to their studies that operationalize trustworthiness and analyze
ability, benevolence and integrity from the banker’s perspective, our study looks at
trustworthiness and its elements from the perspective of a small business owner. We used a
factor extraction method – principal factor analysis (PFA) to reduce seven variables into
smaller components and determine the number of factors to retain. We located those factors
with eigenvalues greater than the average of the initial communalities (squared multiple
correlations). The analysis showed that the average of these communalities was 0.518. The
first two factors were associated with eigenvalues greater than 0.518 (3.337 and 0.794,
respectively). We confirmed these results by a scree test. Although this unrotated solution
provided us with relatively easily interpretable results, we used varimax rotation with the
Horst normalization procedure to further polarize the loadings. Since all the loadings were
above the threshold of 0.4, we set it along with the two-factor solution. As we planned to use
these two factors in subsequent analysis, we tested the reliability of the summated scale (1–5)
based on Cronbach’s alpha coefficients (0.81 and 0.87, respectively) which showed the
relatively high internal consistency of the items.
Table 2.
Principal factor
JSBED
analysis and pairwise
correlation
Decomposed trust Pearson’s correlation
Description
The business owner rates their Std. Factor Factor
Variables satisfaction with/agreement that Mean Dev ability ben_int Uniq (1) (2) (3) (4) (5) (6) (7)
(1) ability1 Bank’s interaction 4.177 0.905 0.7241 0.4302 1.000
(2) ability2 Bank’s knowledge of the business 4.029 0.921 0.8025 0.3022 0.660* 1.000
(3) ability3 Bank’s knowledge of the local 4.207 0.877 0.7486 0.3415 0.640* 0.688* 1.000
market/community
(4) ability4 Bank’s anticipation of the 3.871 0.943 0.6834 0.4699 0.531* 0.650* 0.598* 1.000
business’s financial needs
(5) ben_ A bank has the best interests in
4.106 1.063 0.7148 0.4316 0.323* 0.359* 0.392* 0.343* 1.000
int1 mind
(6) ben_ They can share business concerns
4.035 1.045 0.7499 0.3803 0.326* 0.342* 0.422* 0.376* 0.646* 1.000
int2
(7) ben_ They can share business values 4.135 0.965 0.6673 0.5033 0.300* 0.352* 0.350* 0.295* 0.554* 0.583* 1.000
int3
Note(s): ***p < 0.01, **p < 0.05, *p < 0.1
Source(s): Authors’ calculations based on their business–bank relationship survey data, 2022
The rotated factors showed that the first four items (ability) loaded to the first factor. The last Business-bank
three items, related to benevolence and integrity (ben_int), loaded to the second factor. Table 2 relationships
shows the two factors resulting from PFA.
4.2.2 Bank communication. For our last hypothesis (H2), we tested the effect of preference
and crises
for personal communication with a bank on the existence of a business–bank personal
relationship including the variable bankcomm. This variable estimated a respondent’s
preferred way of communicating with a bank. The value of 1 indicated “personal”
communication, and 0 was used for “hybrid or e-banking”. Nearly 40% of respondents
preferred personal communication with their bank.
4.2.3 Control variables. The vector for business characteristics involved six variables.
The variable bankloan examines the borrowing pattern of business owners. It represents a
concentration of borrowing when on average, small businesses tend to have only one lender
compared to large firms with about three lenders (Peterson and Rajan, 1994). It is a dummy
variable taking the value of 1 if a business owner had a bank loan or line of credit and 0 if
otherwise. Sixty percent of small businesses in our sample had a bank loan or line of credit.
The business legal form (legalform) is a dummy variable that takes the value of 1 if a
business owner was a sole owner or sole proprietor and 0 if otherwise (partnership, limited
liability company - LLC, corporation or subchapter corporation). Familyowned is a dummy
variable that equals 1 if the owner identified their business as a family business and 0 if
otherwise. Femaleowned is a dummy variable with the value of 1 if the business owner was a
woman and 0 if otherwise. Women own 34% of businesses, and 62% are family-owned
businesses. We included business size using the number of employees (employees) as a
continuous variable.
Variable busactivity is a dummy variable describing the primary business activity.
The variable consists of two aggregated categories: 1 5 Industry sectors (natural resources;
mining, oil and gas extraction, construction, manufacturing, wholesale and retail trade),
0 5 Services (professional services, education, health care, entertainment and food services).
Businesses in our sample are almost equally distributed between industry sectors and
services. Small businesses are often concentrated in sectors that require fewer capital assets.
Forty-three percent of the businesses in our sample fall within the services category, mainly
professional and food services.
The variable for education is a categorical variable that equals 1 if a business owner’s
educational attainment was grade 12 or GED and less, 2 5 college 1 year to 3 years and 3 5 4-
year college graduate and higher. The length of a relationship between a small business
owner and a community bank representative is an important dimension of a relationship. The
business–bank relationship may be correlated with years of experience in the current
business. Thus, we included years of business experience (experience) as a continuous
variable. Summary statistics for the variables are shown in Table 3.
5. Results and discussion
We used logistic regression analysis to determine the effect of trust, satisfaction and
communication preference on having a personal relationship with a community bank. To test
our hypotheses, we ran two regression analyses. The first model (Model 1) includes a variable
trust that consists of all three elements of trustworthiness (ability, benevolence and integrity).
In the second model (Model 2), we decomposed trust and tested the significance of its two
factors: ability (ability) and aggregated benevolence/integrity (ben_int). Both models contain a
variable for preferred bank communication (bankcomm).
After culling for missing values, the final sample was reduced from 201 to 135
observations for both models. Using a link test, we tested the model specification as the logit
regression (Pregibon, 1980; Turkey, 1949). The variable hatsq in both models was
Table 3.
JSBED
Summary statistics of
variables
Std.
Variable Mean Dev Min Max Pearson’s correlation
Bankrelation 0.543 0.500 0 1 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12)
(1) trust 4.087 0.708 2.286 5 1.000
(2) ability 0.000 0.923 3.459 1.106 0.914* 1.000
(3) ben_int 0.000 0.884 2.828 0.985 0.902* 0.653* 1.000
(4) 0.397 0.491 0 1 0.119 0.078 0.130 1.000
bankcomm
(5) bankloan 0.478 0.501 0 1 0.181* 0.147 0.185* 0.188* 1.000
(6) legalform 0.381 0.487 0 1 0.011 0.062 0.066 0.023 0.192* 1.000
(7) 0.577 0.495 0 1 0.040 0.059 0.003 0.230* 0.193* 0.250* 1.000
familyowned
(8) 0.343 0.476 0 1 0.003 0.030 0.031 0.051 0.209* 0.222* 0.046 1.000
femaleowned
(9) 0.518 0.501 0 1 0.037 0.080 0.008 0.005 0.308* 0.007 0.021 0.100 1.000
busactivity
(10) 6.115 8.301 0 45 0.111 0.034 0.168* 0.004 0.444* 0.162* 0.067 0.161* 0.233* 1.000
employees
(11) 17.771 14.674 0 63 0.023 0.002 0.051 0.115 0.236* 0.264* 0.302* 0.229* 0.033 0.108 1.000
experience
(12) 2.189 0.809 1 3 0.086 0.071 0.099 0.266* 0.208* 0.189* 0.088 0.051 0.015 0.101 0.153* 1.000
education
Note(s): ***p < 0.01, **p < 0.05, *p < 0.1
Source(s): Authors’ calculations based on their business–bank relationship survey data, 2022
insignificant (P>jzj equals 0.163 for Model 1 and 0.59 for Model 2). We did not identify any Business-bank
multicollinearity in the final sample. The lowest tolerance value of the variance inflation relationships
factor (VIF) (Chatterjee and Hadi, 2006) was 0.49 and the highest was 0.96 for Model 1, and
0.49 and 0.86 for Model 2. Finally, we employed Pearson’s goodness-of-fit test to find other
and crises
significant explanatory variables predicting RELATIONSHIP after running the models. The
Pearson statistics were 0.63 in Model 1 and 0.47 for Model 2, which were not significant and
indicated a good model fit.
5.1 Results
Table 4 provides the regression analysis results for the determinants of small business
owners having a relationship with community banks. The analysis reveals that trust in a
banker is statistically significant and positively associated with a business owner’s
willingness to develop a business–bank relationship and supports hypothesis H1. Ability, as a
component of trust and a proxy for satisfaction, is also statistically significant and positively
associated with relationship banking. This implies that business owners who are satisfied
with the ability of a banker to talk with them to learn about their business, local market or
community and anticipate their financial needs may be more likely to create a personal
relationship with a bank and, thus, supports hypothesis H1a. Interestingly, aggregated
benevolence/integrity (ben_int) as another trust component is not statistically significant.
This suggests that the business–bank relationship may not be associated by a business
owner’s belief that a bank has their best interest in mind, that they can share their business
concerns and that the bank has shared values. Thus, the analysis does not support
hypothesis H1b.
Model 1 Model 2
Variable Coeff St. Error Signif Coeff St. Error Signif
Business–bank relationship characteristics
Trust 0.123 0.045 ***
ability 0.666 0.315 **
ben_int 0.009 0.326
bankcomm 2.126 0.607 *** 2.142 0.617 ***
Business characteristics
bankloan 0.066 0.555 0.034 0.557
legalform 0.424 0.518 0.496 0.522
familyowned 0.149 0.512 0.156 0.511
femaleowned 0.662 0.501 0.620 0.499
busactivity 0.230 0.470 0.309 0.475
employees 0.018 0.029 0.026 0.031
Business owner characteristics
experience 0.012 0.017 0.01 0.017
education (i. Grade 12 or GED and less)
College 1–3 years 0.191 0.657 0.217 0.655
4-year college graduate and higher 0.196 0.639 0.176 0.630
Constant 1.806 1.597 ** 1.925 1.617 **
Number of obs 135 Number of obs 135
Prob > χ 2
0.006 Prob > χ 2
0.009 Table 4.
Pseudo R2 0.168 Pseudo R2 0.170 The logistic regression
Note(s): Significance of coefficients in the model according to the Z-test: ***p < 0.01, **p < 0.05, *p < 0.1 models of business–
Source(s): Authors’ calculations based on their business–bank relationship survey data, 2022 bank relationship
JSBED The preferred way to communicate with a bank seemed to be a crucial aspect of having a
business–bank relationship. Preferring personal communication (bankcomm) is positive and
statistically significant. Therefore, business owners who prefer personal communication may
be more likely to have a relationship with a community bank, which supports hypothesis H2.
This implies that businesses favoring personal contact with a bank may be more willing to
create a business–bank relationship than those choosing a fully remote connection via
e-banking or a hybrid option. A hybrid option means that businesses usually use e-banking
for transactions or routine financial needs and leave the personal interface for more
complicated financial matters. Our results also suggest that business legal form, business
owner’s gender, business activity, number of employees, business experience and education
are not statistically significant factors in the development of a personal relationship with a
community bank.
5.1.1 Robustness check. Following Moro and Fink (2013), we tested the interdependency of
trust and its components - ability and ben_int – and other business–bank relationship-related
variables. Zand (1972) argues that trust development is a nonlinear and rather circular
process, making it difficult to untwist causes and effects. However, Mayer et al. (1995) show
that trust is dependent on a number of internal and external factors, such as the
characteristics of the business and business owner, but at the same time, trust is expected to
be separated and different from the business owner and business characteristics. Thus, we
used regression analysis with trust, ability and ben_int as dependent variables and regressed
them against business and business owner characteristics. All three regressions are not
significant. The outcomes indicate the results’ robustness and differentiate trust, ability and
ben_int from other independent variables. It means that trust and its components serve as
crucial aspects of the personal business–bank relationship and extend the list of variables
defining the banking relationship.
5.2 Discussion
Our study shows that trust, defined by all three factors of perceived trustworthiness (ability,
benevolence and integrity), may be associated with the business’s decision to establish a
business–bank relationship. There is no generally accepted definition of trust, but the concept
proposed by Mayer et al. (1995) is widely recognized. It defines trust as “the willingness of a
party to be vulnerable to the actions of another party based on the expectation that the other will
perform a particular action important to the trustor, irrespective of the ability to monitor or
control that other party” (p. 712). In line with this definition, our results reveal that the
propensity to trust a banker may lead to a higher willingness to set up a relationship.
Multifaceted trust includes various elements, for example, a banker’s best interest in mind,
sharing values and problems and a banker’s interaction and knowledge of a business and
community. This points to the complexity of trustworthiness. Our findings are consistent
with Frankel (2008), who argues that trust is related to a rational belief that a banker tells the
truth and keeps their promises.
Uzzi (1999) claims that relational trust is associated with sharing values and objectives.
This may be even more important in rural communities where business owners are more
embedded in their communities from a business and family perspective (Amato et al., 2021).
In fact, Guiso et al. (2004) find that trust-based financial operations are more common in small
communities with more social capital. Our findings concur with Guiso et al. (2004) that
business loans are financial transactions requiring trust, particularly between the rural small
businesses we surveyed and community banks.
However, based on our findings, business owners might be aware of their potential
vulnerability while sharing concerns and problems about their company with their bankers.
This is consistent with a culture of secrecy, when the business can have an active role in the
decision-making process of how much confidential information, they are willing to provide to Business-bank
a lender (Von Rheinbaben and Ruckes, 2004). This secrecy is in contrast with how much relationships
information the banker would like businesses to share with them. Banker 1 contributed to this
point from the bank’s perspective,
and crises
I would say that if somebody’s got an established relationship, it just makes sense that we’ve got
more history and more of a comfort with how they operate and what their profitability is. We expect
regular updates on what their financial position is, there again always looking for them sharing all
the details of what the conditions are.
A business’s decision on how much soft and hard information to share with a banker is a
crucial aspect of a business–bank relationship as it has a strong implication on information
asymmetry. Most survey respondents reported they feel they can freely share their business
values, problems and concerns with a banker. However, feeling pressured to actually share
their private information might impact an existing or future business–bank relationship.
Pasiouras et al. (2021) find that a national/regional culture of secrecy affects the number of
bank relationships. The culture of secrecy is out of our study’s scope but would deserve
future research. Our findings suggest that bankers may need to continuously invite business
owners to share information about their business without business owners feeling it puts
their business at risk if things are not positive. Business owners should feel that their banker
is a partner and not just a supplier of credit.
Although different studies dispute the link between satisfaction and customer loyalty
(Williams et al., 2011), we found that the satisfaction of business owners with the banks’
interactions may positively affect a business–bank relationship. The ability of a banker to
talk with their clients influences their clients’ satisfaction and the extent of actual or potential
relationships (Perry and Coetzer, 2009). On the other hand, community banks also strongly
emphasize communication with their clients. As Banker 2 suggested,
You [business owner/manager] need a banker that’s going to listen to you and then from listening to
you, start asking the questions to get you to understand what it is that you really need.
And added,
Because if I can get an understanding of whatever it is that you’re involved with, if I can get an
understanding for that, now I can help you. But if I’m not real clear on that, I may give you a solution
that’s totally off base, and that’s not what you need. That’s why I’m a firm believer in going to the
customer as opposed to the customer coming here.
The banker statements coincide with the results of our model that businesses that prefer
personal communication over remote communication are more likely to develop a personal
business–bank relationship with a community bank. Our findings concur with Howcroft et al.
(2007), who argue that small business owners prefer personal contact with their banks,
especially in times of crisis. Bank managers play a crucial role in a social network by
providing information about alternative financial resources and potential customers (Dyer
and Nobeoka, 2000). To this point, Banker 2 claimed,
I think that our role as a community banker is I need to really understand your [business owner/
manager’s] business, and the only way I can do that is I have to stay in constant contact with you. Not
every week but at least once a month or once a quarter at the very end.
Findings about providing a banker with sufficient information and its verifiability align with
the results of other studies (Peterson and Rajan, 1994; Kano et al., 2011) and are particularly
important during times of crisis.
Small business disaster loans increase the likelihood of business recovery from both
natural disasters and the Covid-19 pandemic (Davlasheridze and Geylani, 2017; Deitch and
JSBED Corey, 2011; Hiramatsu and Marshall, 2018; Katare et al., 2021). Torres et al. (2019), in their
study of small businesses after Hurricane Katrina, find that small businesses with links to
community institutions such as banks were more likely to be resilient. Given that disaster
loans have a significant effect on small business recovery, it is important for businesses to
have pre-established relationships with a bank prior to moments of crisis.
Banker 1 expressed the opinion on providing PPP loans to well-established customers as,
. . . and there was some basic financial information that were required of those PPP loans, and I
would share that it was much more convenient if someone was an existing client and we prepared a
PPP loan application for them, and helped them secure it, than if it was not a client of ours.
However, a very small percentage of disaster-stricken small businesses apply for disaster
loans (Runyan, 2006; Zhang et al., 2009). Katare et al. (2021) reveal that less than a third of
small business owners in their study applied for PPP loans. Bureaucratic red tape and lack of
experience in loan applications are some of the main reasons for the lower prevalence of SBA
disaster loan applications among small business owners (Runyan, 2006). In line with findings
of Runyan, the most frequent responses provided by the respondents about why they do not
have a relationship with a bank include no need to have a bank, a bank having no interest in
the business, difficulty with the loan application and a high probability of loan rejection.
Thus, a banker’s ability to establish trust and open paths of communication with the
businesses they serve today may be the very thing that helps these businesses access the
resources they might need to recover from future disasters.
5.3 Study limitations
As part of this research, we also acknowledge several limitations, mainly related to
methodology, and offer suggestions for further research. This study provides insights into
the social aspects associated with creating business–bank relationships. Our results imply
that those relationships are not necessarily associated with personal and business
characteristics but may be based on the business owner’s trust and personal
communication with a bank. However, it can be argued that the reverse causation scenario
is highly likely, and the already existing formal or informal relationship with a bank
positively influences trust and satisfaction. Handling endogeneity in the cross-sectional
dataset is extremely difficult because all variables are measured simultaneously.
Nevertheless, it is possible to prioritize variables and results based on the theoretical
arguments and the theoretical plausibility of reciprocal effects (Lynch and Brown, 2011).
The use of cross-sectional data is another limitation of this study. Unlike longitudinal
studies, our dataset does not separate between a presumed cause and its possible effect.
To address this drawback, follow-up interviews with interviewed community bankers and
surveys targeting small businesses can determine changes in the behavior of bankers and
small business owners during the time of crisis and after the event.
Likely common to many other voluntary online business surveys, an exposed weakness in
this method of data collection is non-response bias. The reasons for the low number of
responses might include ease of not responding and unwillingness to share personal and
business data. Because the number of observations is not optimal, we backed our arguments
with thorough theoretical reasoning and the qualitative research component - key informant
interviews (Mehmetoglu and Jakobsen, 2017). In view of the limited sample size that we
employ in our research, we do not consider the study findings as definitive. Rather, they
should be viewed as preliminary and indicative, inviting further investigation.
Another limitation relates to common method bias caused by the possible common rater
effect. This effect arises when the respondent (a rater) of dependent and independent
variables is the same and leads to a tendency to respond to the survey questions in a
consistent way (Podsakoff et al., 2012). We minimized this response bias by applying different Business-bank
measurement instruments. For example, our dependent variable is a binary variable, and relationships
trust and satisfaction-related questions were measured using a Likert scale format. In
addition, the order of our survey questions does not suggest a causal link between dependent
and crises
and independent variables to avoid pivoting respondents’ answers to fit the assumed
relationship. Notwithstanding its limitations, this study provides evidence to bolster the
significance and value of an interdependent social relationship between rural small
enterprises and their banks, particularly during periods of crisis and uncertainty.
6. Conclusion
We recognize that the financial health of rural small businesses is crucial for their prosperity
and survival and, subsequently, for the social and economic development of communities.
Thus, we underline the significance of relationship banking for small rural businesses in
times of crisis and high uncertainty, such as the Covid-19 pandemic. We examine how trust in
a community bank, satisfaction with a community bank’s interaction and preferred way of
communication with a bank may be associated with the willingness of business owners to
establish a personal relationship with their bank representatives.
Our results contribute to the literature on the role of trust and its components in
relationship banking. A business owner’s trust in a banker may be positively associated with
the establishment of a business–bank relationship. However, an analysis of individual trust’s
components reveals that the nature of trust is complex, and a failure of one or more
components may lead to decreased trustworthiness of a trustee. These findings suggest that
bankers in community banks should be aware of the importance of trust for small business
owners and act in a way that leads to their increased trustworthiness. For example, higher
satisfaction with bank services and community involvement may increase trust in a banker.
In contrast, the feeling of being under pressure to share all business information may
discourage a business owner and reduce the trustworthiness of a banker.
Preference for in-person interaction with a bank can be viewed as extended trust in a
banker. A business owner who prefers in-person communication with a banker over a virtual
option may feel more confident in sharing information and inclined to develop a relationship
with a bank. The study outcomes propose that maintaining a business–bank relationship is
not only important to recover from normative business cycle shocks but also from non-
normative shocks such as natural disasters and the Covid-19 pandemic. Recent disasters
have made it clear that business owners need to build personal relationships with their banks
to access the resources they might require during a disaster.
Notes
1. D & B Hoovers is an aggregate database of companies, business news, and industry information.
2. The study was approved by Institutional Review Board. The study number assigned is IRB-2022–134.
3. See Miller et al. (2020) for an explanation of Qualtrics recruitment methods and samples.
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About the authors
Dr Zuzana Bednarik works at the North Central Regional Center for Rural Development, Purdue
University, and conducts applied research in the broad area of rural social and economic development,
such as small entrepreneurship, community development, rural demography and regional data
availability and needs. Zuzana Bednarik is the corresponding author and can be contacted at:
zbednari@purdue.edu
Professor Maria I. Marshall conducts an applied research, teaching, and Extension program in small
and family business management, disaster recovery and entrepreneurship. Dr Marshall is the Director of
the North Central Regional Center for Rural Development. She is also the director and founder of the
Purdue Institute for Family Business.
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