Small business debt financing: the effect of lender structural complexity

Abstract

PurposeSmall- and medium-sized enterprises (SMEs) depend on a large measure on commercial banks for external capital, and US SMEs are increasingly experiencing bank credit constraints and resorting to costly alternatives. The purpose of this paper is to investigate the impact of lender organizational complexity on SME financing shortfalls. In particular, it examines the credit shortage effects associated with the SME's reliance on bank holding company (BHC) owned, as opposed to independent, lenders.Design/methodology/approachBuilding on agency–theoretic rationales, the authors posit that both hierarchical and horizontal complexity associated with present-day BHC structures will diminish an affiliated bank's ability and willingness to properly underwrite SME credit needs. Consequently, they hypothesize that SMEs whose commercial lenders are BHC affiliates are likely to experience greater credit shortages. This hypothesis was tested using exhaustive financial data from a large and nationally representative sample of US SMEs.FindingsGreater SME reliance on loans from BHC lenders was found to be associated with a greater use of late trade–credit payments. The latter is an expensive form of financing and a generally accepted indicator of shortages in conventional (and cheaper) bank credit.Originality/valueDespite the evolution toward more complex bank organizational forms, especially among community banks, the implications for SME lending are not yet fully understood. This paper's contribution is to offer a first examination of the impact of post-deregulation BHC structures on SME financing shortfalls.

Effect of Debt Financing on Financial Performance of Selected State Corporations in Kenya

“…This has begged the question why debt financing is being opted for running state corporations. For example, Franquesa and Vera (2021). asserts that state corporations such as Agricultural Finance Corporation and Industrial & Commercial Development Corporation have resorted to debt financing.…”

Diagnosing default syndromes: early symptoms of entrepreneurial venture insolvency

“…, 2020), bank credit continues to be the main financial source for SMEs (Beck et al. , 2018, 2011; Franquesa and Vera, 2021), being fundamental for their economic activity and survival.…”

“…Despite their role, access to credit or other financial sources is not easy for many SMEs. Although the last decade has seen the development of new financing alternatives (including non-banking onesamong others, crowdfunding (Eldrige et al, 2021) and peer-to-peer financing mechanisms (Liu et al, 2020), bank credit continues to be the main financial source for SMEs (Beck et al, 2018(Beck et al, , 2011Franquesa and Vera, 2021), being fundamental for their economic activity and survival.…”

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“…Do something new and different and be an example of achievement. The owner of the project is the one who creates a job opportunity for himself and for others, which contributes to alleviating the phenomenon of unemployment, and to training and rehabilitating his workers, and also contributes to providing products required in his community and the educated project owner can enter new technology, and develop alternatives to what is imported (Franquesa & Vera, 2021).…”