Evolución histórica de DSM y Demand Response

Drawing upon the UK Small- and Medium-Sized Enterprise Finance Monitor Survey (2011–2015), this research investigates the profile of SME owners who are discouraged from borrowing by their banks as a consequence of an informal loan turndown. Although entrepreneurial finance has recently paid attention to the latent demand of loan markets, the reasons behind discouragement generally remain unclear. However, it appears that informal loan turndowns represent a portion of this phenomenon.

This research compared the characteristics of firms that reported informal turndown (ITs) with those firms that reported discouragement due to a subjective fear of rejection (DBs). While ITs rely on their banks’ opinions to avoid costs of application and the potential consequences of rejected applications, DBs decisions are based on their own judgements. This work hypothesizes that (among non-applicants who need external finance) older and larger firms, firms that have better relationship with their banks, and firms that are in more need of credit are in better position to enquire with their banks about the potential outcome of an application and would be, therefore, relatively more likely to experience an informal turndown. Three hypotheses were partially, but not fully, confirmed. A caveat to this work is that it remains unclear what percentage of official applications are the result of informal approvals.

Hypothesized to be a factor in the likelihood of informal turndowns, firm size was not significantly correlated with the likelihood of informal turndown. Conceptually the scale of a loan seemed to be a reasonable precursor of the likelihood of informal turndown, as this was not supported by empirical analysis perhaps points to the key role played by the lending relationship.

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An interesting finding of this research is the effect of business age in discriminating among the reasons for postponing formal loan applications. Business age, possibly a proxy for the amount of information available to banks, shows mixed effects on discouragement in the literature. While some researchers do not find a significant effect of age on probability of discouragement (Chandler, 2010; Freel et al., 2012), others report negative effects (Chakravarty and Xiang, 2013; Cole and Sokolyk, 2016; Cowling et al., 2016; Ferrando and Mulier, 2015). Surprisingly, Han et al. (2009) find that older firms are more likely to be discouraged. In this work, the effect of business age is explained through its link with the businesses’ relationships with banks. Specifically, most UK firms are satisfied with their banks and they do not change their banks often. The older a firm gets, the more likely it is to have a working and established relationship with its bank. This work reports that owners of older firms seek confidential opinion from their banks more often, being more frequently informally turned down. Younger firms, on the other hand, are more likely to fear rejection, or, perhaps, they don’t yet have a specified account manager (Chandler, 2010). Given that young firms are also among successful loan applicants, addressing discouragement among young firms might be more fruitful than a more general approach.

In addition, the work includes measures of the quality of banking relationship. The literature has partially confirmed that having better relationship with banks reduces the propensity of discouragement (Chakravarty and Yilmazer, 2009; Freel et al., 2012). Han et al. (2009) reported that longer relationships with banks increase the probability of discouragement for bad borrowers and decrease the likelihood for good borrower. Therefore, they conclude that discouragement is an efficient sorting tool. Nonetheless, the

177 previous research is equivocal as some research shows no significant or negative effects of relational lending on discouragement (Chakravarty and Xiang, 2013; Chandler, 2010; Cole and Sokolyk, 2016; Cowling et al., 2016). Using a set of variables that control for the quality of the relationship between SME owners, this research finds among non- applicants who need credit, having a satisfactory relationship with banks could increase the probability of discouragement due to fear of rejection. Business owners who are happy with their banks potentially are aware of their own creditworthiness and the availability of the loan, therefore, they could anticipate rejection if a formal or informal applications were to be advanced.

In terms of the need for capital, exporter firms and process innovators were linked with higher probabilities of informal turndowns. Growing firms are more likely to seek external finance but face higher probabilities of rejection (Riding et al. 2012; Freel 2007; Lee 2014). For these firms, financing needs are so acute that they do not settle on their own judgement on the outcome of finance applications.

The main limitation of the research is that the data do not reveal which applicants, having spoken with their respective loan account managers, applied for a bank loan. Nor do we know the outcomes of those applications. Therefore, our analysis is only able to compare the various types of discouraged borrowers. Nonetheless, this work has established the presence of an additional category of SME owners who otherwise might have seemed to be discouraged borrowers, but who actually eschew loan applications for just cause. This is a finding that at the very least, reduces the scale and scope of what might otherwise be considered a market imperfection associated with the presence of discouraged borrowers. These findings provide initial insights about informal turndowns—a phenomenon about

178 which little is known—thereby helping to develop a yet better understanding of discouraged borrowers and the dynamics of the SME-commercial lender relationship. Further research is required to explore the outcomes of informal discussions between potential borrowers and their banks and advance a theoretical framework for examining the efficiency of such informal discussions. Furthermore, the mediatory role of longer/ better banking relationship in ameliorating lending market efficiency through informal turndowns yet to be studied further.

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