Perceived competence and credit access of SMEs: can trust change the rules of the game?

Banks play an essential role in financing firms and especially small and medium en-terprises (SMEs). The process used by banks to decide whether and how much to lend is complex and banks rely on different lending techniques. Relationship lending, by leveraging a variety of private information gathered through contact with the firm, its owner, and the local community, has a peculiar role and can benefit SMEs by providing them with easier access to credit. No previous research focuses specifically on the perceived competence of the entrepreneur or the owner/manager of the firm as well as on competence as a substitute of trust. The present paper tries to fill this gap. The research is based on a panel of 535 entrepreneurial SMEs which operate in the widely studied and economically successful North East of Italy. The data were collected by administering a survey to bank managers of local community banks and of two national banks. The regressions show that competence is positively related to overall credit gained and negatively related to interest rate. In addition, in low trusted SMEs, credit gained is positively related to competence while the interest rate is negatively linked to competence. In highly trusted firms, these relationships are not significant. Our findings support the point that competence is an important factor irrespective of the quality of the firm and that it is a substitute for trust in low-trusted SMEs. The findings have two major implications: banks should develop tools that are capable to catch the competence of the entrepreneurs irrespective of the performance of the firm depicted in the firms' data; the entrepreneurs need to effectively communicate their competences to the relevant stakeholders such as the bank managers. Thus, perceived competence can play an important role during economic downturns when the performance of the firm is affected by hostile eco-nomic environment

Trust and the Demand for Personal Collateral in SME - Bank Relationships

Previous research on relationship lending has paid very little attention to the role of trust. Trust might be ex-pected to reduce agency costs, perceived credit risk and thus the request for personal collateral. Trustworthiness is associated with three attributes of SME owner/managers’: ability, benevolence and integrity. We hypothe-sised that loan managers’ assessment of the trustworthiness of owner/managers is negatively associated with the personal collateral demanded by banks. Using the quantitative and qualitative data about 457 SMEs-bank rela-tionships in North East Italy, we tested this hypothesis. The results show that trust has a minor role in reducing the request of collateral

The Debt Structure of SMEs: An Optimization Model

The existing finance literature is inadequate with respect to its coverage of the debt structure of small and medi-um sized enterprises (SMEs). In addition, the role of trust in accessing finance for such enterprises is under-investigated. This paper presents a mathematical model for optimizing the debt structure of SMEs that, since SMEs are often equity constrained, focuses on optimizing debt structure by minimizing its cost. The model is then extended by incorporating the level of trust that suppliers and bank managers have in the enterprise. The extended model, suggests that the higher the level of trust that bank managers and suppliers have in the SME, the more short-term finance an SME can obtain and should use

Addressing the challenges of post-pandemic debt management in the consumer and SME sectors: a proposal for the roles of UK financial regulators

Regulatory actions for short-term debt-relief during the Covid-19 pandemic are facilitating a significant level of indebtedness. We argue that regulators, in leaving the banking sector to manage small business and consumer debtors in ‘tailored arrangements’, risk allowing financial welfare goals to be unmet. Financial welfare goals are important to the Financial Conduct Authority’s (FCA) consumer protection objective and give substantive meaning to the long-term financial stability objective of the Prudential Regulation Authority (PRA). Although the struggles with debt on the part of small and medium-sized businesses and households are not capable of complete resolution by financial regulators, who are constrained by their statutory mandates, we argue that the PRA and FCA should establish a coordinated supervisory framework of ‘tailored supervision’ for banks’ ‘tailored arrangements’ with their debtors. This proposal allows both regulators to address to an extent the needs of unsophisticated post-pandemic debtors and meet their objectives in a joined-up and holistic manner

Modelling trust evolution within small business lending relationships

Trust is a key dimension in the principal-agent relationship and it has been studied extensively. However, the dynamics, evolution, and intrinsic motivation and mechanisms have received less attention. This paper investigates the intrinsic motivation of trust and it proposes a theoretical model of trust evolution that is based on the notion of ‘trust response’ and ‘trust spiral’. We then specifically focus on trust within the lending relationship between banks and small businesses, and we run numerical simulations to further illustrate the evolution of involved mutual trust over time. Our model provides implications for future research in both trust evolution and small business lending relationships

Advances in Crowdfunding: Research and Practice

publishedVersio

Translating transactions: markets as epistemic and moral spheres

In this Modern Asian Studies book symposium, scholars of South Asia analyse the political, ethical, and epistemic aspects of market life. They build on the 2020 Cambridge volume, Rethinking Markets in Modern India: Embedded Exchange and Contested Jurisdiction, edited by Ajay Gandhi, Barbara Harriss-White, Douglas Haynes, and Sebastian Schwecke. This interdisciplinary conversation approaches transactional realms from the disciplines of history, anthropology, development studies, and political economy. The symposium’s contributors examine a range of pertinent issues that encompass customary forms of exchange and capitalist aspects of trade. Among the topics discussed are those of market fetishism, bazaar knowledge, social embeddedness, forms of transactional representation and translation, and institutional and regulatory contexts for commerce.Global Challenges (FGGA

Advances in Crowdfunding

This open access book presents a comprehensive and up-to-date collection of knowledge on the state of crowdfunding research and practice. It considers crowdfunding models and their different manifestations across a variety of geographies and sectors, and explores the perspectives of fundraisers, backers, platforms, and regulators. Gathering insights from a wide range of influential researchers in the field, the book balances concepts, theory, and case studies. Going beyond previous research on crowdfunding, the contributors also investigate issues of community, sustainability, education, and ethics. A vital resource for anyone researching crowdfunding, this book offers readers a deep understanding of the characteristics, business models, user-relations, and behavioural patterns of crowdfunding

The entrepreneur-financier relationship across institutional logics: A study in Thailand

Ph. D. Thesis.Entrepreneurs can draw support from various types of financiers, including crowdfunding, angel investors, venture capital funds, corporate venture capital funds, and public subsidies. However, most research focuses on a single source of finance, most often venture capital funds. Prior studies do not give a complete picture of how the relationship between entrepreneurs and investors unfolds over time. The focus is mainly on how investment decisions aremade, even though engagements after striking a deal are equally crucial to the relationship. These gaps in understanding offer an opportunity to understand entrepreneurs and their contexts, particularly when looking at the microlevel entrepreneur-financier dyad. In addition, as Welter (2011) notes, contexts matter. These contexts have a multiplicity of levels in that they both intertwine with and shape regulatory and normative contexts at wider levels (community, regional, and national). The entrepreneurfinancier dyadic relationship is arguably formed in a broader context. It is thus worth considering the potential effect of context on the relationship. This research explores the relationships between entrepreneurs and financiers in Thailand using an institutional logics perspective: a value system that prescribes behavioural templates for focal actors (Thornton et al. 2012). The focus is on the context of how a relationship is fostered during a new venture financing process. By examining fine-grain differences in practices between entrepreneurs and various financiers, the research deconstructs what comprises the emergence of their relationships and explains the distinct context within which each pathway is formed. This is a promising lens for explaining differences in entrepreneur-financier relationships. The literature has conceptually suggested that each type of financiers will possess dominant institutional logics, and such logics will shape their interactions with entrepreneurs when assessing prospective deals. The study utilises a qualitative research design involving indepth interviews with entrepreneurs and financiers – corporate venture capitalists, venture capitalists, angel investors, and government funding agencies – in Thailand. A total of 36 interviews were conducted with 20 entrepreneurs and 16 financiers. This thesis proposes a comprehensive framework that delineates the emerging relationships between entrepreneurs and various types of financiers. Each path develops under its own practices with hybrid logics that are underpinned by the broader context. However, the institutional logics shaping the relationship deviate from those previously characterised in the 3 literature. The most striking findings involve entrepreneurs’ relationships with corporate venture capital and angel investors. The former are shaped by both corporate and professional logics, whereas quasi-community logics shape the latter. A different relationship pattern is found in government funding, shaped by state logic complemented by market logic. Practices with venture capitalists coincide with those in the literature, indicating a predominance of professional logics in the relationship. Based on these findings, practical recommendations are provided for entrepreneurs planning to approach financiers in relation to what financiers look for at different phases of relationship formation and what entrepreneurs can expect from financiers. Policy recommendations are also offered for those interested in championing entrepreneurship through the design of financing tools concerning institutional logics found in entrepreneur-financier dyads in emerging economies