Bank lending decisions and small firms: does size matter?

Abstract

Uses survey data to examine the nature of bank lending decisions at the local branch and regional office level. In doing so considers which firm and loan characteristics explicitly affect the nature of the lending contract. The results show the smallest firms, whose lending decisions are made at local branches, face slightly higher borrowing costs, yet this is offset by the reduced likelihood of collateral being requested. Further, suggests that the high degree of control aversion exhibited by such firms acts in a detrimental way by negating many of the obvious benefits of a localized banking relationship. On interest rate margins, presents clear evidence supporting credibility and legitimacy theories, with legal status and a lengthy track record reducing margins significantly. Regarding security levels, the results suggest that local branch banks have particularly short‐term lending horizons. The penalty in terms of collateral requirements on medium‐ to long‐term loans appear quite severe. This issue needs to be addressed to ensure that small firms in the UK receive the lower cost, longer‐term finance that would facilitate the structural growth of this sector.