“Too Important to Fail”: Do Banking Relationships Improve Spanish SMEs Credit Conditions?

Abstract

One of the main reasons why SMEs have not been able to achieve an important growth or even survive is because of their difficulty to get credit access. But they are “too important to fail”. This study explores the possibility of developing strong banking relationships to improve the SMEs’ financial conditions offered by banks. This possibility has been empirically tested from a sample of Spanish SMEs. First of all, empirical evidence shows that the longer the banking relationship is, the better the credit access becomes. The same criterion applies where the number of financial entities is concerned: the more financial entities the SMEs work with, the easier the access to credit becomes. Secondly, credit cost diminishes when the banking relationship strengthens through the negotiation of new financial products. Thirdly, empirical results report that long-term credit is achieved when the duration of the banking relationship is longer. Lately, the requirement of guarantees by the financial entity lessens once SMEs contract other financial products with the same bank.