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Small business debt financing: the effect of lender structural complexity

Jaume Franquesa (James F. Dicke College of Business Administration, Ohio Northern University, Ada, Ohio, USA)
David Vera (Department of Economics, Craig School of Business, California State University, Fresno, California, USA)

Journal of Small Business and Enterprise Development

ISSN: 1462-6004

Article publication date: 5 April 2021

Issue publication date: 23 April 2021




Small- and medium-sized enterprises (SMEs) depend on a large measure on commercial banks for external capital, and US SMEs are increasingly experiencing bank credit constraints and resorting to costly alternatives. The purpose of this paper is to investigate the impact of lender organizational complexity on SME financing shortfalls. In particular, it examines the credit shortage effects associated with the SME's reliance on bank holding company (BHC) owned, as opposed to independent, lenders.


Building on agency–theoretic rationales, the authors posit that both hierarchical and horizontal complexity associated with present-day BHC structures will diminish an affiliated bank's ability and willingness to properly underwrite SME credit needs. Consequently, they hypothesize that SMEs whose commercial lenders are BHC affiliates are likely to experience greater credit shortages. This hypothesis was tested using exhaustive financial data from a large and nationally representative sample of US SMEs.


Greater SME reliance on loans from BHC lenders was found to be associated with a greater use of late trade–credit payments. The latter is an expensive form of financing and a generally accepted indicator of shortages in conventional (and cheaper) bank credit.


Despite the evolution toward more complex bank organizational forms, especially among community banks, the implications for SME lending are not yet fully understood. This paper's contribution is to offer a first examination of the impact of post-deregulation BHC structures on SME financing shortfalls.



Franquesa, J. and Vera, D. (2021), "Small business debt financing: the effect of lender structural complexity", Journal of Small Business and Enterprise Development, Vol. 28 No. 3, pp. 456-474.



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