Negative Banking Perceptions Hinder Young Companies

Posted on: 25 April 2016

It is often asserted that poor availability and accessibility of credit are hindering the SME sector. But newly published research from Trinity College Dublin shows that sometimes it’s not a supply issue, but a demand one.

The study found that many companies who might well have good projects, and which might make attractive loan prospects, will not apply to banks for loans for fear of being rejected.

Some of the key findings from ‘Discouraged Borrowers: Evidence from Eurozone SMEs’ include:

• Of the 6,287 small and medium companies interviewed, across nine Eurozone states, firms in Ireland had the greatest non-application rates because of fear of rejection.
• Non-application for fear of rejection was as follows: Ireland 44%; Germany 24%; Greece 19%; Belgium 18%; Austria 17%; Spain 17%.
• It is the younger, smaller firms that are more likely to be discouraged.

In recent years governments and regulators worldwide have put initiatives in place to relieve perceived blockages to credit. Banks, in turn, say they have funds available to lend to good creditors.

However some ‘good prospects’ are still turning their backs on potential investment due to a perception that their loan application will be rejected. This is bad for the economy and the banks as on both counts business opportunities are being missed.

One of the lead authors of the report, Professor in Finance Brian Lucey, from Trinity’s Business School, commented: ‘"Discouraged borrowers, firms that would have good prospects but who are not borrowing for a fear of rejection, represent a not insignificant problem in the EU.

“Banks and governments need to do more to educate firms as to the credit available and to persuade banks to look at firms on their books which have not followed their peers in borrowing. This is not to advocate pushing credit on unwilling customers – it is to suggest that we should focus more on those who could borrow for good projects but who do not.” 

The study’s authors recommend improved education and awareness for SMEs to help overcome this issue.

To view the study visit here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2758338