1050 SW 6th Ave.

Suite 1100

Portland, OR 97204




  • Facebook Social Icon






Personal Relationships Can Be a Powerful Determining Factor In Small Business Lending

Banks and large, headline-grabbing merchant-cash funders tend to rely on hard numbers, especially those taken from credit history reports, when determining the eligibility of a small business’s credit.

However that data alone is often not enough to make the best decision possible. Rather, the more subtle, and often difficult process of evaluating a merchant’s social credibility can help to make a more informed decision about how likely they are to default on a loan. And it starts with a conversation -- making a personal connection with the merchant.

Qualitative analysis of borrowers was often used by small rural banks working with local companies that have a verifiable standing in the community. By contrast, loans made by national financial institutions are more likely to default, as they don’t form actual relationships with clients.

The main reason for this is that direct relationships with clients make it easier for lending institutions to assess the “Social Capital” of a company, a term which was first popularized in the book “Bowling Alone” by Robert Putnam. This is a concept that is determined through the measurement of how often a person participates in local social life, through civic, religious, and familial institutions.

Unfortunately, many lenders started turning away from building relationships with their clients in the 1990s, when banks found that they were able to simply use credit scores and account records to mathematically determine whether they should loan money to an organization. While this led to greater default rates, that was offset by the lower cost of acquisition that was required to find and approve customers. And not having to get to know their clients also freed up resources and cast a wider net. At the same time, with SBA loans, the losses to defaults were often covered partially, mitigating the risk.

While acquiring more customers, for less time, money, and resources, works out for many lenders, it increases overall defaults, ultimately hurting merchants.