shot of approved paycheck protection application

Community banks a key resource for small businesses when crises arise

New research from the UF Warrington College of Business finds that relationship lending and a simplified organizational structure allow community banks to be a better source for Paycheck Protection Program funding to small businesses.

The American Rescue Plan, a $1.9 trillion stimulus package introduced by the Biden Administration, recently received Congress’ approval. The stimulus package, like its two predecessors aimed at providing relief for individuals and businesses hindered by the COVID-19 pandemic, includes another round of funding for the Paycheck Protection Program (PPP).

The American Rescue Plan includes $7.25 billion for PPP loans as well as a number of changes to make it easier for the smallest of businesses to gain access to the funding. With billions on the table for struggling small businesses, new research from the University of Florida Warrington College of Business finds that community banks are a critical source for helping these businesses keep their workforce employed during the pandemic through PPP loan access.

Christopher James and Jing Lu.

Warrington’s Christopher James and Ph.D. student Jing Lu.

“Smaller community banks have traditionally been an important source of funding for small businesses,” said Christopher James, William H. Dial/SunTrust Eminent Scholar and research author. “Community banks tend to be relationship lend­ers, characterized by local ownership, local control and local decision making. Relationship lenders had strong incentives to make PPP loans in order to preserve small business relationships in the face of the massive economic downturn caused the pandemic.”

In their research, James, Warrington Ph.D. student Jing Lu and Georgetown University Ph.D. student Yangfan Sun, find that community banks were able to respond faster to PPP loan requests from small businesses as compared to larger banks. They also find that community banks made more PPP loans per dollar of deposits than larger banks, particularly during the early stages of the pandemic.

“Community banks tend to specialize in lending based on close personal ties between the loan officer and the small business customer,” James said. “This type of lending requires providing branch managers with greater decision rights in making lending decisions. As a result, lenders at community banks were able to respond faster when the PPP was introduced.”

Consistent with community bank focus on small business lending and their faster implementation of PPP lending, the authors find significantly more PPP loans per small business in counties where community banks had higher market shares. More important, the authors find that higher levels of PPP lending are associated with significantly fewer small business bankruptcies.

“The goal of PPP was to mitigate the adverse impact of the pandemic on small businesses,” James said. “The significantly lower rate of bankruptcies among small businesses in areas with higher levels of PPP lending suggests that the PPP provided real benefits to small businesses.”

Overall, James, Lu and Sun’s research finds that community banks are an important source for small businesses when crises, like the COVID-19 pandemic, arise and business owners need to secure help quickly to continue paying their employees.

This research has been accepted for presentation at several upcoming conferences.