Analyzing the Relationship Between Crime and Small Business Lending: Considering Lending from a Credit Risk Perspective

Small businesses serve important functions in the communities in which they serve. These businesses tend to rely on external sources of financing, such as loans, to operate and expand. Thus, it is important to consider variables that may impact the loans they receive. In studies and discussions about how certain variables influence business lending, income and race are two that have been largely focused on. One less discussed variable has been crime. This analysis aims to understand the relationship between crime and lending. The motivation for analyzing crime comes from thinking of lending from a credit risk perspective. Crime imposes costs to local businesses and thus threatens their viability. In turn, this may make lenders hesitant to lend, meaning that crime can negatively influence lending.

The analysis studies Chicago community areas and finds evidence that crime does have a negative relationship with lending. In turn, it is recommended that policymakers promote and enhance lending incentive programs, such as the New Markets Tax Credit (NMTC) Program, in an effort to encourage lending by rewarding lenders for the risks they take on.