AMERICAN JOURNAL OF SOCIAL AND MANAGEMENT SCIENCES ISSN Print: 2156-1540, ISSN Online: 2151-1559, doi:10.5251/ajsms.2010.1.2.102.123
© 2010, ScienceHuβ, http://www.scihub.org/AJSMS
Banking relationship and credit terms: empirical evidence from Portuguese small firms
Miguel Neves Matias1, Zélia Serrasqueiro2 and Carlos Arriaga Costa3 1Management and Economics Department of Polytechnic Institute of Leiria and Management and Sustainability Research Center Leiria, Campus 2, Morro do Lena - Alto do Vieiro, 2411-
901 Leiria Apartado 4163, Portugal e-mail: firstname.lastname@example.org
2Management and Economics Department, Beira Interior University, Estrada do Sineiro, 6200-209, Covilhã Portugal, and CEFAGE Research Center, Évora University
e-mail: email@example.com 3Economics Department of Minho University, Campus de Gualtar
4710 - 057 Braga, Portugal e-mail:firstname.lastname@example.org
Based on a sample of Micro and Small-sized Enterprises (MSE) financed by a large Portuguese bank, this study seeks to assess the importance of the banking relationship for MSE to obtain better credit terms, i.e. higher credit limit, lower risk premium and less probability that collateral must be provided. We conclude that long term banking relationship alone is not important for firms to obtain better bank credit terms. However, greater borrowing concentration allows MSE to obtain a lower risk premium and a higher limit of credit. The magnitude of these impacts are affected by some specificities related to firm size, economic-financial performance and the position of the lending bank in the local banking market.
Keywords: Banking relationship; Credit terms; Small firms.
Small businesses, which play a key role in generating employment and creating economic wealth, face restrictions in accessing bank credit and in the terms of loan conditions. The significant difficulties in accessing external finance arise partly from small firms´ financial fragility and the legal opacity of information that they give to the lenders. The relationship between accounting information and the economic-financial performance, actually in evidence, is frequently in question, given the freedom of accounting "elaboration", rarely audited, not rated and with multiple schemes for presenting their financial statements, leading to the minimization of the tax burden (Le Guirriec, 1996). It is in this context that assessment of the banking relationship acquires vital importance in determining the credit risk of Small and Medium-sized Enterprises (SME). SME operate in a particular context, characterised by heavy interdependence; between the "personal sphere" of the business-owner and the "business sphere"; and the administrative and financial
organization are characterized by informality of relationships; and, by the vital and dominant importance of the business-owner (Levin and Travis, 1987; Belletante and Levratto; 1995). Indeed, the profile, know-how, and...