Business advice and lending in small firms

Abstract

The literature on lending to small firms has primarily focused on the mechanisms and methods used to evaluate entrepreneurs and businesses and on the types of firms that are more likely to experience unfavourable application outcomes. That is, the focus of most empirical research is on supply-side decisions. The current research attempts to shed some light on demand-side considerations. Drawing upon data collected as the UK SME Finance Monitor (2011-2014), we identify links between entrepreneurs' diligence, business risk and finance-related advice-seeking prior to initiating loan and overdraft applications. The results show evidence of the usefulness of advice in ameliorating, both structural and strategic, business risk and improving the prospects of successful debt applications to banks.

Who is a good advisor for entrepreneurs?

“…Second, this dataset covers not only the information on the sources of external advice, but also the information on new firms. Previous studies that control for these sources do not focus on new firms (e.g., Bennett and Robson 1999;Bennett 2000a, 2000b) and previous studies that focus on new firms do not control for such sources (e.g., Cumming and Fischer 2012;Rostamkalaei and Freel 2017), which may be due to data limitations. Finally, our dataset even includes entrepreneurs' fundraising situation before and immediately after startup and business performance immediately after startup.…”

“…In addition, other studies find that external advice improves firm performance (e.g., Kent 1994;Bennett and Robson 1999;McMullan 2000, 2004;Lambrecht and Pirnay 2005;Cumming and Fischer 2012;Sawang, Parker, and Hine 2016). In these strands of literature, several studies classify the sources of advice (e.g., Bennett and Robson 1999;Bennett 2000a, 2000b) while other studies focus on new firms (e.g., Cumming and Fischer 2012;Lahti 2014;Rostamkalaei and Freel 2017).…”

Debt Characteristics Knowledge of Entrepreneurs in the SME Sector of the Czech Republic

“…Riskier strategies increase perceived environmental uncertainty and, from the perspective of potential funders, information opacity. [32] Various types of research clearly show that the access to finance is one of the main challenges for the growth and development of entrepreneurs, especially in the SME sector. [1; 2; 16] The demand and supply of finance to the SME sector involves more complex issues than applied to large firms.…”

“…For these reasons, mainly, smaller firms have historically been identified as especially susceptible to credit rationing. [32] The empirical research shows that asymmetric information and agency costs in small business lending can be alleviated by imposing a shorter loan maturity because it will reduce the riskshifting behaviour of the borrower [3; 26] Rostamkalaei and Freel [32] state that discouraged borrowers do not apply for credit because they are afraid of rejection -despite their declared neediness and despite being observationally indistinguishable from those who have applied for and have received money. There is also evidence that some entrepreneurs face initial rejection or are presented with unsuitable terms of contract at the first attempt and must re-apply, renegotiate or switch banks for a better deal.…”

Leaders and financial risks in small and medium enterprises

“…Most small and medium enterprise (SMEs) think of the financial risks only once a year with regard to their annual tax and balance sheets. Most of them do not even know how to deal with general business risks, not speaking about the complexity of the financial markets and its derivates (Rostamkalaei and Freel 2017;Bialowąs 2018).…”