Relationship lending and SME financing in the continental European bank-based system

Relationship lending and SME financing in the continental European bank-based system This paper analyzes the relationship between banks and SMEs in the continental European bank-based system. We find that SMEs with longer bank relationships have enhanced access to loans, but at the same time they bear a higher cost for their debt. We also find that firms maintaining two bank relationships get the cheapest debt, which establishes a limit for the degree of concentration of bank relationships. Our results also show that the existence of trust between firm and bank improves access to financing and reduces the borrowing costs, whereas it increases the likelihood that guarantees will have to be provided. As a consequence, it seems that a relationship based on trust is a better strategy to improve SMEs’ access to finance than the establishment of longer or more concentrated relationships. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Small Business Economics Springer Journals

Relationship lending and SME financing in the continental European bank-based system

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Publisher
Springer US
Copyright
Copyright © 2008 by Springer Science+Business Media, LLC.
Subject
Business and Management; Management; Microeconomics; Entrepreneurship; Industrial Organization
ISSN
0921-898X
eISSN
1573-0913
D.O.I.
10.1007/s11187-008-9129-7
Publisher site
See Article on Publisher Site

Abstract

This paper analyzes the relationship between banks and SMEs in the continental European bank-based system. We find that SMEs with longer bank relationships have enhanced access to loans, but at the same time they bear a higher cost for their debt. We also find that firms maintaining two bank relationships get the cheapest debt, which establishes a limit for the degree of concentration of bank relationships. Our results also show that the existence of trust between firm and bank improves access to financing and reduces the borrowing costs, whereas it increases the likelihood that guarantees will have to be provided. As a consequence, it seems that a relationship based on trust is a better strategy to improve SMEs’ access to finance than the establishment of longer or more concentrated relationships.

Journal

Small Business EconomicsSpringer Journals

Published: Sep 6, 2008

References

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