Does relationship lending help firms to ask for credit? European cross-country evidence

Relationship lending is well known to allow SMEs to obtain credit, however one of the most crucial obstacles for these firms is not obtaining credit but applying for credit in the first place. We explore how relationship lending impacts the demand for credit, i.e., borrower's discouragement. Using a European cross-country survey of more than 2300 firms in 2010, we show that firms that rely on relationship lending to get access to credit refrain from applying in the first place. We show that this result is due to a self-rationing mechanism: riskier firms employing relationship lending tend to be more discouraged. Instead, the use of transactional lending reduces discour-agement, and this effect does not depend on firms' risk. Our results suggest that firms employing relationship lending know their own likelihood of rejection better and can decide when not to apply.

Automated summary

Relationship lending is commonly known to help SMEs obtain credit, but one of the major obstacles faced by these firms is the initial application process for credit. This study examines how relationship lending affects the demand for credit, specifically the discouragement of borrowers. Through analysis of a cross-country survey of over 2300 firms in Europe in 2010, it is found that firms relying on relationship lending tend to refrain from applying for credit in the first place. This is attributed to a self-rationing mechanism, where riskier firms using relationship lending are more likely to be discouraged. On the other hand, the use of transactional lending reduces discouragement, regardless of firm risk. These findings indicate that firms utilizing relationship lending have a better understanding of their likelihood of rejection and can make informed decisions on whether or not to apply for credit.