July 17, 2003

 

Rural Small Businesses Doing Well

Rural small businesses are very similar to urban small businesses in terms of their financial characteristics, access to technology and financial services, sources of financial capital and creditworthiness, according to research by Cole Gustafson, North Dakota State University agriculture economist. "On average, rural and urban small businesses were strong financially and profitable," Gustafson says.

Historically, the financial performance of credit markets and small businesses in rural areas has been a topic of active professional debate, Gustafson notes. "Past studies evaluating the performance of rural financial markets has not provided definitive assessments primarily because they relied on selected localized information, case studies and anecdotal observations."

"Numerous critics contend that rural small businesses are rationed capitol or have difficulty obtaining it," Gustafson says. "However, there are programs available to increase capital flows into rural areas."

According to Gustafson’s national research, the majority of firms are organized as sole proprietorships. Less than 6 percent of small businesses are organized as partnerships. Rural small businesses are significantly more likely to be organized as sole proprietorships as opposed to corporations.

Other findings from Gustafson’s research:

• Rural small businesses rely more on mortgage financing as a source of capital than urban small businesses. The average balance on mortgages supporting rural small businesses is $160,686.
• Rural and urban small businesses use vehicle loans as a source of capital to the same extent (20 percent of firms). The average vehicle loan balance exceeds $25,000.
• Urban and rural small businesses do not use equipment financing extensively. Small business equipment is often so specialized with minimal salvage value that financing is difficult to obtain. Plus, many small business equipment manufacturers may not have the financial capacity to offer financing programs.
• Credit options in rural areas may be more limited so rural businesses rely more heavily on mortgages and other loans rather than on shorter-term financing such as credit cards. However, statistically rural small businesses operate in regions of lower bank concentrations.
• Rural small businesses are less likely to be delinquent on business obligations but more reluctant to apply for mortgage loans for fear of being denied.

Computer usage among rural small businesses significantly lags behind urban firms, Gustafson notes. "Rural firms are less likely to use computers for banking, e-mail, Internet sales and administrative functions. However, rural firms utilize computers for inventory management more frequently than urban firms. It may be that greater distances may prevent vendors from performing that function for them."

The entire study is available on the Web at http://agecon.lib.umn.edu/  or by writing to: Carol Jensen, Department of Agribusiness and Applied Economics, NDSU, Box 5636, Fargo, ND, 58105-5636. E-mail inquiries should be sent to cjensen@ndsuext.nodak.edu , by phone at (701) 231-7441 or fax at (701) 231-7400.

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Source: Cole Gustafson, (701) 231-7096, cole.gustafson@ndsu.nodak.edu
Editor: Rich Mattern, (701) 231-6136, richard.mattern@ndsu.nodak.edu