The value of social capital in small business lending: Evidence from the Small Business Administration program

Abstract

We explore how social capital influences small business lending under the Small Business Administration (SBA) program. We find that banks reduce loan spreads for SBA borrowers located in counties with high social capital. This effect is stronger among SBA Express lenders or when lenders face higher information asymmetry, but weaker during periods of more government assistance and SBA guarantee. Firms located in higher social capital counties are also less likely to default on their loans. Overall, our findings highlight the role of social capital—as an important source of soft information— in the pricing and performance of small business loans.