The purpose of this paper is to identify pre‐loan factors that ultimately impact post‐loan risk ratings of small business in southern Arkansas.
Ordinary least squares linear regression analysis is conducted on small business data to determine which factors contribute to higher post‐loan credit risk ratings.
Businesses with records of loan repayment and personal financial assets at stake are more likely to be assigned better credit risk ratings. Additional analysis indicates that businesses with no past due collections or judgments, having good trade references, a profitable business, and not operating in a volatile industry are much more likely to result in loans ultimately receiving good post‐loan performance marks and lower risk ratings.
This paper has a small sample of firms in a historically economically depressed region. While the relevant factors seem intuitive they may not apply to other regions and/or larger businesses.
Results of this paper may be interesting to loan officers of banks and other lenders, particularly in this region given the current financial crisis.
This paper is the first to analyze actual data from small businesses in southern Arkansas. The results may help the organizations attempting to aid economic development in this region.
