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

Abstract

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