What are the strategies for small business lending?

Strategies to Obtain a Working Capital Line of Credit for Small Businesses


Solomon Atamaya

MS, DeVry University, 2014

BS, Kaplan University, 2012

Doctoral Study Submitted in Partial Fulfillment

of the Requirements for the Degree of

Doctor of Business Administration

Walden University

December 2021 Comment by Natalie Casale: Change this date to March 2022


Strategies to Obtain a Working Capital Line of Credit for Small Businesses


Solomon Atamaya

MS, DeVry University, 2014

BS, Kaplan University, 2012

Doctoral Study Submitted in Partial Fulfillment

of the Requirements for the Degree of

Doctor of Business Administration

Walden University

December 2021 Comment by Natalie Casale: Change this date to March 2022




SNC Internal Information

SNC Internal Information

List of Tables

List of Figures

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SNC Internal Information


Section 1: Foundation of the Study

Small businesses account for over 50% of all companies in the United States (U.S. Small Business Administration [SBA], 2018b), having a positive effect on gross domestic product (Klimczak et al., 2017). Small businesses are an integral part of the economies of both developed and underdeveloped countries (Karadag, 2015); however, small business owners struggle to stay in operation longer than 5 years (SBA, 2018a). In 2013, 406,353 start-up businesses opened; in the same year, however, 46% of businesses closed (SBA, 2018b). A manager’s ability to acquire working capital could affect business continuity and reduce the failure rate (Leroy et al., 2015). Therefore, all business leaders need to have plans to acquire working capital (Lampadarios, 2016). The purpose of this multiple case study is to explore strategies that small business owners use to obtain a working capital line of credit for business continuity.

Background of the Problem

More than 500,000 small businesses constitute 97% of businesses in Maryland and employ more than 1 million people (SBA, 2018b). In 2014, 4,074 new small businesses started in Maryland, and in the same year, 3,730 businesses closed, marking a large percentage of failed small businesses compared to those opened (SBA, 2018b). External funding is necessary for the sustainability and growth of small businesses (Neagu, 2016). Access to financial resources is essential for business leaders to pay for operating expenses, debts, inventory, and business growth. Many business leaders attribute business failures to external factors, whereas internal management capabilities and approaches significantly impact business sustainability (Eggers & Lin, 2015). Poor management skills and an inability to access finances are the main reasons for business failure (Lee, 2016). Accordingly, I will explore effective Maryland small business owners’ effective strategies to obtain a working capital line of credit for business continuity for 5 years or longer.

Problem Statement

Insufficient access to funds, including lines of credit, causes 29% of small businesses to fail within the first 5 years of operation (Shabat, 2019). Small business owners encounter challenges obtaining a working capital line of credit (U.S. Federal Reserve Bank, 2017). The general business problem is that some small business owners cannot access working capital lines of credit, which threatens business survival through liquidity shortages, lost customers, and falling profitability. The specific business problem is that some small business owners lack strategies to obtain a working capital line of credit for business continuity.

Purpose Statement

The purpose of this qualitative multiple case study is to explore strategies that small business owners use to obtain a working capital line of credit for business continuity. The proposed study’s population is small business owners in Maryland who have obtained a working capital line of credit for business continuity. Information gleaned from this study will expand understanding of the economic, social, cultural, and structural issues small businesses face in securing working lines of credit. Among the implications for social change are that small business owners may be able to sustain operations, thus providing employment opportunities that could increase the standard of living and contribute to citizens’ well-being in the local communities. Another implication for social change is that sustaining small business operations will allow their customers to continue receiving the products and services they need, contributing to their quality of life and the sustainability of their household or business operations.

Nature of the Study

The three research methods are qualitative, quantitative, and mixed methods (Yin, 2017). In a qualitative study, a researcher explores a phenomenon (Glaser & Strauss, 2017); in comparison, a quantitative researcher statistically measures the relationship between variables (Goertzen, 2017). A researcher employs both qualitative and quantitative approaches in mixed methods (Yin, 2017). Because I will not use numerical data to understand the research phenomenon in this study, neither the quantitative nor mixed methods approach is appropriate; therefore, I will use the qualitative methodology with a case study design.

I considered narrative, ethnographic, phenomenological, and case study designs for this qualitative study. Using a narrative design, a researcher obtains individuals’ life stories in a storytelling format (Marshall & Rossman, 2016). The ethnographic design meets the needs for a cultural study of specific groups. In a phenomenological study, participants describe their lived experiences of a phenomenon (Hanson et al., 2011). A case study permits the researcher to capture a real-life phenomenon in a specific setting by asking how and why questions (Cronin, 2014). This type of qualitative design is ideal for the current study because my goal is to explore a research phenomenon in a real-life setting by asking how and why questions to identify common factors.

Research Question

What strategies do small business owners use to obtain a working capital line of credit for business continuity?

Interview Questions

  1. What strategies did you use to obtain a working capital line of credit?
  2. What are the significant challenges you encountered in securing a working capital line of credit?
  3. How did you overcome the challenges you encountered in securing a working capital line of credit?
  4. What strategies did you use to develop a successful banking relationship to secure working capital?
  5. How, if at all, did you have to modify the initial strategies you used for obtaining a working capital line of credit?
  6. What else could you share that is pertinent to the procedures for obtaining credit for your business?

Conceptual Framework

This study’s conceptual framework is the theory of discouraged borrowers (TDB), created in 2003 by Kon and Storey. According to TDB, some small business owners are discouraged from applying for bank financing for three primary reasons: asymmetric information, application costs, and market rates (Kon & Storey, 2003). The idea of credit rationing from banks is one component of business owners’ discouragement, which may prevent them from applying for bank loans. The TDB is applicable to the proposed study because it provides a framework appropriate to explore small business owners seeking to obtain a working capital line of credit for business continuity. The business environment is becoming faster paced because of economic shifts, globalization, and technological breakthroughs (Guillén et al., 2014). This rapidly changing environment means business leaders must adjust their behavior in adapting to new information and approaches to acquiring credit (Lichtenstein & Plowman, 2009). The TDB provides a conceptual framework to understand why some small business owners face difficulties in applying for and obtaining a working capital line of credit for business continuity beyond 5 years.

Operational Definitions

Adaptive leadership: A style of leadership that involves understanding the leadership process, strategizing, and adapting to change across all organizational levels (Reiman et al., 2015).

Cash flow: Net income plus depreciation, amortization, and depletion (Deakin, 1972).

Small business: An entity with fewer than 500 employees (SBA, 2018a).

Working capital: The operating liquidity of a business, which is the difference between current assets and current liability (Nguyen et al., 2016).

Working capital line of credit: A line of credit that provides flexible cash through short-term financing for business continuity and sustainability (Cowton & San-Jose, 2017).

Assumptions, Limitations, and Delimitations


Assumptions are beliefs that a researcher cannot verify but presumes to be true (Marshall & Rossman, 2016). In this study, the first assumption is that a qualitative approach with a multiple case study design will be appropriate for answering the research question. Another assumption is that the participants will provide honest responses to the interview questions. If participants withhold information or misrepresent their experiences, my findings will not be accurate. I also assume that interviews with five small business owners and reviews of their company documents will be sufficient to achieve data saturation, without which I could not have confidence in my results.


Limitations stem from methodology and design issues beyond the researcher’s control (Yin, 2017). One limitation of this study is the use of qualitative methodology because qualitative findings are subjective and dependent upon the researcher’s interpretation (see Dennis, 2018). Accordingly, the risk of researcher bias is another limitation. Because of the small sample size and specific qualification criteria, the transferability of qualitative findings may be limited and, therefore, subject to the reader’s opinions regarding applicability to other populations or situations. Qualitative data analysis is another limitation because reliability and validity are dependent on the researcher’s determination of all relevant themes and achieving data saturation.


Delimitations are the boundaries set by a researcher as criteria for participation (Theofanidis & Fountouki, 2019). The scope of the proposed study is limited to exploring the phenomenon of strategies small business owners have used to secure a working capital line of credit for business continuity. Delimitations for participation include owners of manufacturing and wholesale small businesses in Maryland that employ 500 or fewer employees and have been in operation longer than 5 years. Outside the scope of the study are owners of newly created, nonregistered businesses not in operation 5 years or longer, not located in Maryland, or employing more than 500 people. There were no delimitations concerning participants’ gender, age, race, or immigration status.

Significance of the Study

Some small businesses fail because of insufficient access to working capital (Liu, 2015). Securing a line of credit may ensure business continuity and growth, resulting in continued and advancement opportunities for employees and a more thriving community. The findings of this study may be of value to businesses in several ways. First, small business owners can learn of the strategies used by other small business owners to successfully obtain a working capital line of credit, thus ensuring business continuity beyond 5 years. Contributions to positive social change may come from more small business owners maintaining their businesses’ operation, continuing to employ their workers, and economically benefiting the community.

Contribution to Effective Practice of Business

The results of this study can contribute to business practice in at least two ways. First, small business owners may learn about and implement credit acquisition strategies that lead to increased business performance in the long term. Individuals considering opening small businesses may also find these results helpful when creating their business plans and forecasts. The research findings may be valuable to small business owners, banking officials, government agencies, and creditors in understanding the strategies small business leaders use to access credit.

Contribution to Positive Social Change

Small business owners play an important role in facilitating the health of the local economy (Brown, 2018). The community can benefit from the results of this study in many ways. Considering that sustainability is a pathway to a significant competitive advantage, small business owners may be willing to participate in new programs in the community and invest more in their workforce’s well-being. The increase of small businesses operating in the community leads to job creation, poverty reduction, and the potential for a higher standard of living among citizens (Shibia & Barako, 2017). Employees’ families also benefit when individuals prosper in a healthy working environment with increased opportunities for employment.

Review of the Professional and Academic Literature

Conducting the literature review on the research topic involved accessing various journals and seminal books through the Walden University Library website. Databases searched included ABI/INFORM Complete, ProQuest Central, Emerald Management, Business Source Complete, Academic Research Complete, and SAGE Premier. I also conducted searches through Google Scholar and AOSIS Open Journals. Google Scholar queries provided various interdisciplinary results, including conference proceedings, and AOSIS Open Journals searches returned peer-reviewed scholarly articles from a wide range of academic disciplines. A review of business journals and publications returned research specific to small businesses and small business owners. Government websites, including those of the SBA and the Maryland Chamber of Commerce, provided valuable information on small businesses’ credit strategies and programs.

In searching for relevant literature, I gave preference to peer-reviewed articles published between 2018 and 2021 to obtain current information and findings. Ulrich’s Periodicals Directory was a helpful tool to ensure the articles were peer reviewed. Keywords and combinations of keywords used for the search included small business, business lending, small business lending, small business financing, credit strategies, bank loans, sources of financing, working capital line of credit, small business and financial constraints, small business continuity, capital structure, information asymmetry, and the lending process, small businesses and audited financial statements, small business leadership, the theory of discouraged borrowers, and small business and discouraged borrower. The literature review search produced 142 sources, 137 (85%) of which were peer-reviewed articles published between 2018 and 2021. Comment by Natalie Casale: Solomon, You want to count what you used. This is what I have calculated: 28 out of 67 are from 2018 – 2022 = 41.7% Take a look at the document I shared that shows how I figured out this information. I have identified the sections that could use current resources: Theory of Discouraged Borrowers Analysis of Potential Themes Credit Strategies Information Symmetry in the Lending Process Audited Financial Statements Focus on the last three highlighted in blue. This should be easy to do.

I compared and contrasted the work of different scholars to obtain varied perspectives on the research phenomenon. The first overarching concept, the likelihood of application for and approval of a working capital line of credit, emerged from discussions of the TDB in the context of small businesses. The discussion topics related to the second concept, small businesses, included small business sustainability, small business challenges, and government roles. The concept of small business financing emerged from literature on funding programs, sources of capital, and credit strategies, with a fourth concept of information symmetry in the lending process.

Application to the Applied Business Practice

The purpose of this qualitative multiple case study is to explore strategies that small business owners use to obtain a working capital line of credit for business continuity. The literature review begins with an in-depth exploration of the conceptual framework of the TDB and how researchers have used it in related studies. Other relevant topics discussed are small business financing, credit strategies, information symmetry in the lending process, and audited financial statements.

Theory of Discouraged Borrowers Comment by Natalie Casale: Add resources from 2018 – 2022 in this section. This is what you have now: Theory of Discouraged Borrowers Ata et al. (2015) Bhusal and Wang (2019) Caporale and Gil-Alana (2016) Chandler (2010) Cole and Sokolyk (2016) Freel et al. (2012) Han et al. (2009) Jude and Adamou (2018) Kon and Storey (2003) Levenson and Willard (2000) Moro et al. (2015) Njeru et al. (2013) Sahin et al. (2011) Singh (2014) Tang et al. (2017) Yan et al. (2015)

The TDB emerged in the early 21st century when Levenson and Willard (2000) explored how insufficient credit and credit rationing discouraged small business owners from applying for loans. As Levenson and Willard labeled them, the majority of discouraged applicants were founders of smaller, less-established businesses. Levenson and Willard examined U.S. small business owners who encountered credit rationing in their quest for external financing. They drew data from a national survey of businesses in 1987 and 1988—the first years for which direct data were available specific to business owners’ desire for credit—that indicated only a small percentage (2.14%) of small business owners had applied for and failed to procure financing, with an additional 2.17% obtaining financing after an initial rejection (Levenson & Willard, 2000). Comparatively, the percentage of small business owners discouraged from applying was 4.22% (Levenson & Willard, 2000).

In 2003, another set of researchers, Kon and Storey, expanded on the idea of discouraged credit applicants to create the TDB. Kon and Storey (2003) described discouraged borrowers as business owners who, despite needing financing for their operations, do not apply for loans for fear that the bank will reject their application. Kon and Storey adopted the discouraged borrower approach to assess loan application success in response to the extensive literature on credit rationing, collateral, and asymmetry. Business owners feel discouraged from borrowing based on perceived high application costs combined with screening errors and public policies not conducive to small business lending. The greatest degree of borrower discouragement occurs when a bank has inadequate information on the applicant’s business (i.e., information asymmetry). Therefore, small business owners who have not successfully obtained a working capital line of credit might have felt discouraged from even applying.

Han et al. (2009) explored the TDB specific to the factors leading a borrower to become dispirited. Following an analysis of data on financing for U.S. small businesses, the researchers indicated that small business owners with riskier businesses were often less likely to apply for bank financing. Han et al. also introduced the concept of information asymmetry in that, as bank transparency increased, the owners’ likelihood of applying for financing increased.

Chandler (2010) drew parallels between discouraged borrowers and their relationships with banks. A critical component of the bank–business relationship is information symmetry, something discussed in later studies concerning small business owners’ ability to obtain working capital lines of credit for business sustainability and growth (e.g., Ata et al., 2015; Caporale & Gil-Alana, 2016; Moro et al., 2015; Njeru et al., 2013; Sahin et al., 2011). Information symmetry refers to transparency in the loan application process about small businesses’ credit history, balance sheets, business plans, and intended use of the financing (Yan et al., 2015); therefore, information symmetry affects the degree of trust between the parties.

Tang et al. (2017) narrowed the TDB to look specifically at the trust component between a business owner and a loan manager and its effect on the business owners’ decision to apply for credit. Their findings showed the business owners’ degree of perceived trust with the lending agency strongly influenced their decision to apply for credit (i.e., the lower the trust, the greater the borrower’s discouragement). Despite the connection between trust and increased access to working capital lines of credit, the longevity of the owner–lender relationship had no bearing on borrower discouragement. An inverse relationship also emerged between the small business owner’s degree of experience and the subsequent discouragement in borrowing. Business owners with prior entrepreneurial experience had a greater degree of trust in lending institutions and were more inclined to apply for credit.

Scholars have conducted extensive research on the difficulties small business owners face to obtain credit and ensure continuity (Freel et al., 2012). Less common, however, are studies of the discouraged borrowers who, rather than risk rejection, choose not to apply for credit. A literature review showed discouraged borrowers outnumbered rejected borrowers by 2 to 1 (Kon & Storey, 2003). Also indicated were four characteristics common among discouraged borrowers of business strategy: industry sector, the business owner’s prior experience, lending relationship, and preexisting banking relationships (Freel et al., 2012). Findings showed that entrepreneurial and firm strategy factors are the primary differentiators between discouraged and rejected small business borrowers (Kon & Storey, 2003). Most likely to be discouraged were owners of smaller or family-owned businesses and those who had previous entrepreneurial experience, offered knowledge-intensive services, or led limited liability partnerships or corporations. Freel et al. (2012) conducted an extensive study of small business owners’ need for bank financing specific to their discouragement from applying. The researchers used information from a large-scale survey of small business organizations that measured the attitudes and opinions of owners, including whether they had applied for a loan, received a loan, or felt discouraged from applying for a loan in the last 2 years. Freel et al.’s findings are directly applicable to the theoretical framework for the proposed research, as the percentage of small business owners with rejected credit applications was half of the rate of discouraged small business owners who had not applied.

One component of Cole and Sokolyk’s (2016) study on small business owners who need and receive credit was the TDB. The four business groups studied were those without a need for financing, those with a need but who feel discouraged from borrowing, those with a need who apply and are approved, and those with a need who apply and do not receive the funds. Specific to the second category of borrowers, the researchers identified four primary components of discouragement: the smaller size of the business, the business’s profitability, the age of the owner, and any access to additional sources of financing. Their findings showed that between 21% and 55% of business owners who had felt discouraged from applying for credit would have received approval. Similar to Freel et al. (2012), Cole and Sokolyk found the likelihood of discouraged borrowers to have received financing was significantly higher than the likelihood of denial.

Some researchers have focused specifically on small business owners’ characteristics as the chief determinant of borrower discouragement. Singh (2014) studied discouraged borrowers with a focus on gender differences, among other factors. Singh’s general findings showed that business owners in the goods sector had a greater need for external financing than did those in the retail and wholesale sectors. In addition, primarily female-owned businesses had less need for outside funding. Singh also identified a parallel between reduced borrower discouragement and both relationship banking and 50-50 male–female business ownership.

Jude and Adamou (2018) suggested that small business owners’ behaviors had the greatest influence on their decision to apply for bank loans and working capital lines of credit. In addition to control aversion and overconfidence, the researchers found discouragement heavily influenced whether a business owner would apply for bank financing. Bhusal and Wang (2019) attributed borrower discouragement to three determinants: the perceived cost of financing, the small business owner’s history with financing, and the would-be applicant’s fear of facing prejudice.

Alternative Theories for the Theory of Discouraged Borrowers

The TDB (Kon & Storey, 2003) was the most applicable theory to the proposed study, with other concepts only peripherally related. The alternative theories I considered to the TDB were the credit theory of money and the theory of financial management.

Credit Theory of Money

The earliest published credit theory was Innes’s (1914) credit theory of money. Innes’s assertion was that money was the only capital that mattered, which directly applies to small businesses needing a working capital line of credit. Innes identified a subtheory to explain a business owner’s satisfaction with the lending process and subsequent ability to repay the loan; however, the author did not address factors affecting business owners’ success in achieving loans. Because Innes’s credit theory of money pertained only to the lending and repayment of business loans and not the strategies used to obtain the loan, it was not appropriate for this study.

Theory of Financial Management

Ang (1991, 1992) proposed a theory peripherally related to the focus of this study. Applied to small businesses, the theory of financial management centered on business failures due to a lack of financing options (Ang, 1991). Ang (1991) wavered in theoretical focus, first introducing the loosely termed theory of modern corporate finance, which applied to businesses of any size. Ultimately, Ang (1991, 1992) conceded that identifying a single theory specific to small businesses’ capital structure was not possible. Ang (1992) explored the difficulty faced by small business owners in securing funding for continued operation. After asserting that no single theory of finance fully addressed small businesses’ unique needs, Ang (1992) differentiated between large and small businesses, finding the latter’s success aligned closely with the business owner’s reputation and the relationships with lenders. The theory of financial management is related to restricted financing options and organizational failure for businesses of any size. The theory does not apply specifically to small business owners and the strategies used to obtain financing for continued operation, making it also not appropriate for this study.

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