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DOES PROXIMITY STILL MATTER? EVIDENCE IN SMALL BUSINESS LENDING

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2025-09-05
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Abstract

To investigate the continued significance of geographical proximity, I conduct an empirical study on its impact on credit pricing for small business lending, taking the distance between small businesses and their corresponding lenders, as well as whether they are located in the same state or zip code area, as proxies for physical proximity. The study involves cross-sectional multivariate regressions based on SBA 7(a) loan data spanning from 2016 to 2022, which coincides with the outbreak of the COVID-19 pandemic.The results indicate that the SBA loan rate increases as distance increases. This relationship holds regardless of whether the borrower or lender is located in an urban or rural area, or whether the lender is a bank or credit union. The findings suggest that rural lenders and credit unions place greater importance on physical proximity, possibly as they tend to maintain in-person customer relationships that rely on soft information obtained. During the COVID-19 pandemic, as the pandemic in the local market gets severe, the positive impact of distance on credit pricing would diminish or even reverse, suggesting that the transportation cost partially shifted from lenders to borrowers. This research contributes to the literature by adopting the most up-to-date data that reflects the rapidly changing world, addressing the gap in analyzing the relevance of proximity during the pandemic that restricts in-person interaction, incorporating the locations and types of lenders, and providing a comprehensive examination of the impact of distance on credit pricing at the most rigorous loan level. The results provide implications to policymakers on how credit pricing responds to geographical proximity under different contexts and under a shock of uncertainty that could help them better utilize financial tools to provide support to credit-challenged entrepreneurs while maintaining financial market stability and vitality.

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60 pages

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2023-08

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Union Local

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Carruthers, John

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Chau, Ho

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Regional Science

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M.S., Regional Science

Degree Level

Master of Science

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dissertation or thesis

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