Financing growing firms and the importance of banking relationships

This study examines how the relationship between a lender and a borrower influences access to credit and the interest rate charged. Relationships between lenders and small business borrowers can arguably help to overcome information opacity. Findings include that whether an SME’s request for a line of credit will be approved appears to be affected by the relationship. As well, the requirement for a business plan or cash flow statement also appears to affect the likelihood of approval. However, the effect of relationship banking on the interest rate charged could not be determined from this analysis. The findings of this are consistent with Berger and Udell (2006) who hypothesize that the method used to underwrite loans can affect how lender-borrower relationships influence lending decisions.