SOTA Review

Discouraged Borrowers: Measurement, Determinants and Impact.


Associated Themes
  • Finance

In recent years increasing attention has been paid to SMEs who do not apply for bank finance for fear of rejection – so-called discouraged borrowers. To date, much of the literature has focused on the measurement of discouragement in SMEs. These firms constitute a major proportion of SMEs with some recent research suggesting they number as many as half a million UK SMEs. However, owing to the different definitions of discouragement adopted, comparisons across different studies are problematic. The growing literature on the determinants of discouragement suggests firm size and age are significant, with nascent and smaller SMEs more likely to be discouraged. Entrepreneurs who are older, female from ethnic minority backgrounds with lower levels of human capital and poorer credit ratings, are more likely to be affected. The evidence base on the potential impact of borrower discouragement is less well established. However, available evidence suggests discouragement may result in reduced investment levels and weaker firm performance. The broader and disaggregated definitions of borrower discouragement used in recent studies provide a useful basis for future comparisons and longitudinal tracking.