Lending relationships in line-of-credit and nonline-of-credit loans: Evidence from collateral use in small business

Lender-borrower relationships facilitate monitoring in small business loans. We investigate how the duration and scope of the bank-borrower relationship affect the decision to secure line-of-credit and nonline-of-credit loans. We find that the likelihood of collateralizing a line of credit decreases with the length of the bank-borrower relationship. For nonline-of-credit loans, however, the incidence of collateral pledge decreases with the number of lender-provided financial services used by the borrower. Our finding indicates that the mechanism through which banks obtain private information depends on the type of the loan. Pooling across loan types may dilute the impact of both the duration and scope on the terms of a loan.