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The latent demand for bank debt: characterizing discouraged borrowers

Research output: Contribution to journalJournal article

Published

Journal publication date05/2012
JournalSmall Business Economics
Journal number4
Volume38
Number of pages20
Pages399-418
Original languageEnglish

Abstract

Concerns that small firms encounter credit constraints are well entrenched in the literature, despite widespread empirical evidence that a relatively small proportion of small firms have their loan applications rejected. However, many firms may be discouraged from applying for fear of rejection. These businesses are the focus of this paper. Based on responses to a large-scale postal survey of UK small and medium-sized enterprises (SMEs), we find that twice as many businesses were discouraged from applying for a bank loan than had their loan request denied. More particularly, we observe a number of distinguishing characteristics of “discouraged borrowers” (relative to applicants). These include: strategy, sector, prior entrepreneurial experience and banking relationships. The implications of our findings for policy and future research are briefly discussed.