The Qualitative Relationship Between Banks and SMEs in Wales

Abstract

A long-term or close and intense relationship with banks could help overcome the main problems like asymmetric information. Using collateral is another way to overcome the effects of asymmetric information. The findings show that having collateral does not reduce loan costs, and on the other hand it will increase the availability of finance for small businesses. In general, small businesses use pecking order theory in choosing their formal sources of finance. Because of their lack of knowledge, they are not completely aware of available sources of finance. Banks are the first and most important external finance provider for small businesses, so having a good long-term relationship with banks can help them to overcome problems like asymmetric information, which would influence their access to more finance. Collateral is the other way to access more finance and it can help small businesses in their relationship with banks, especially in a period of unsustainability to reduce the risks for banks.