Who needs credit and who gets credit? Evidence from the surveys of small business finances

• We classify small firms into four groups based upon their needs for credit.
• We find that “No-Need” firms are similar to “Approved” firms.
• We find “Discouraged” firms outnumber and are different from “Denied” firms.
• We estimate that 1/3 of “Discouraged” firms would have been approved for credit.

We use data from the Surveys of Small Business Finances to classify small privately held firms into four groups based upon their need for credit. Our results reveal strong and significant differences among each of these four groups of firms. Firms that report no need for credit are significantly less levered, more liquid, older, and of higher credit quality than are firms that report a need for credit, and their owners are older, are more likely to be white, are more creditworthy, and have fewer bank and nonbank relationships. Firms reporting that they were discouraged from applying for credit significantly outnumber and are significantly different from firms that applied for and were denied credit on a number of dimensions such as size, profitability, owner age, and the number of sources of financial services. Our counterfactual analysis indicates that about one in three discouraged borrowers would have received credit had they applied for credit. Denied borrowers differ from approved borrowers across numerous characteristics, as previously documented in the literature.