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Despite financial economists’ long-standing interest in the role of lender-borrower relationships in increasing the availability of funds to small businesses, many questions remain unanswered. Numerous empirical studies investigate the effect of relationships on the availability and terms of credit to small businesses (Petersen and Rajan (1994), Berger and Udell (1995), Blackwell and Winters (1997), Cole (1998), Harhoff and Körting (1998), Elsas and Krahnen (1998), Angelini et al.(1998), Degryse and van Cayseele (2000), Bodenhorn (2003)) and many find that relationships improve the availability of credit for some categories of small businesses. But the studies present mixed results on how relationships affect collateral requirements and lending rates, as well as whether relationships affect loan terms and availability via reputation enhancement, as modeled by Diamond (1991) and Boot and Thakor (1994), or via information capture, as modeled by Greenbaum et al. (1989) and Sharpe (1990).

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