An Interpretation of Discouraged Borrowers Based on Relationship Lending

August 2010

Working Paper

Vincent Chandler,
Small Business Branch,
Industry Canada

Summary:

This paper investigates the determinants of discouragement for Canadian small and medium-sized enterprises (SMEs), regarding financing sought.

Table of Contents

Acknowledgements

The author wishes to thank David Storey, Denis Martel, Sascha Wiessmeyer and Richard Archambault for helpful comments.

Abstract

This paper investigates the determinants of discouragement for Canadian small and medium-sized enterprises (SMEs) using firm-level data originating from the SME Financing Data Initiative (SME FDI) 2004. We partially confirm the idea that discouraged borrowers are generally riskier than applicants. Furthermore, we find some evidence that discouraged borrowers have stronger relationships with their financial institution than do denied borrowers. In that sense, discouraged borrowers have better information on themselves and on their financial intermediary and can thus more realistically assess their chances of acceptance. Consequently, they decide not to apply because they are aware of their higher risk.

JEL Classification: G14, G21

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