Back to Borrowing? Perspectives on the Arc of Discouragement Presentation of initial findings BBA 18 th December 2013 Stuart Fraser
Back to Borrowing? Perspectives on the Arc of
Discouragement
Presentation of initial findingsBBA 18th December 2013
Stuart Fraser
Introduction• Key research questions:
– Why are there DBs?• Develop understanding of the mechanisms of discouragement.• (Mis)perceptions of chances of making successful applications vs
perceived application costs.
– What might encourage DBs back to borrowing?• Improving perceptions and/or lowering application costs?
• Mixed methodology:– Econometric analysis speaks to the ‘big picture’.
• Analysis using UKSMEF (2004-2009) and SMEFM (2011 Q1/2-2013 Q2).
– Depth interviews/case studies (BDRC) enable a closer perspective.• Emerging messages for:
– Banks. – Support agencies.– Government.
Arc of discouragement
Who are DBs?
• DBs are examined relative to two other groups: – Businesses that have sought finance (‘seekers’).– Businesses that say they have no need for finance
(‘non-seekers’).• DBs are:– Smaller in terms of sales and business assets than
seekers if not non-seekers.– Smaller in terms of the number of employees than
both seekers and non-seekers.– Younger than seekers/non-seekers.– Riskier than seekers/non-seekers.
Who are DBs?
• The owners of DBs are:– Less wealthy than owners of seeking/non-seeking businesses.– Less experienced than owners of seeking/non-seeking businesses.– Younger than owners of seeking/non-seeking businesses.
A typical DB: has sales below £250,000, business assets of £10,000; fewer than 10 employees; is aged less than 7.5 years; has an average/above average risk rating; is a ‘real estate/business services’ or construction business; is located in London, the West Midlands or East of England; and has a white male owner aged 31-50 with 15 or fewer years of experience and a personal wealth of around £100,000.• Few differences between the indirectly and directly
discouraged. – Indirectly discouraged are slightly smaller/younger/riskier.
Why are there DBs?• We already know that DBs tend to be
smaller, younger and riskier businesses. • We know less about the mechanisms of
discouragement (see right).• What factors shape the perceived prob.
of success?– Previous experiences with lenders. – The borrowing experiences of peers in
business. – Media reports of bank lending.
• Are there cognitive biases in perceptions?– We can’t tell just looking at the associates
of discouragement.
• We need a model to disentangle the perceived prob. of success from application costs. – This matters from a policy perspective.– Improving perceptions/confidence vs
lowering costs/‘hurdles’.
Discouragement occurs when the perceived cost of making a loan application outweighs the perceived chances of the application being successful.
Application costs
Perceived prob.of success
DB model • A productivity threshold () separates
businesses with capital demands () from those without capital demands (). – Location of depends on availability of
internal finance (need) and interest rate.– In a perfect capital market decision to
apply for finance depends only on need and interest rate (hence all businesses with capital demands are seekers).
• In imperfect capital markets information asymmetries mean that loan applications are costly.– A perceived success threshold ()
separates the discouraged, whose perceived chances of success fall below the threshold (), from the non-discouraged ().
• The location of this threshold depends on perceived application costs (‘hurdles’) including:– Perceived cost/hassle of applying (+)– Perceptions that the bank will ask for
security/terms and conditions (+)– Support ()
DB model• The model predicts the existence of 3 known types of business in
the context of borrowing decisions:– Seekers: businesses which have capital demands () and who are not
discouraged ().– Non-seekers: businesses without capital demands (). – Discouraged borrowers: businesses which have capital demands () but
which do not apply because their perceived chances of a successful application are low ().
• The model predicts the existence of a fourth new type:– Discouraged non-borrowers (DNBs): businesses which (no longer) have
capital demands () and which are (or have been) discouraged ().• This is a kind of entrenched/latent discouragement.
– DNBs have slipped into a ‘slough of despond’.
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
2004 2008 20092011 Q1/2 2011 Q3 2011 Q4
2012 Q12012 Q2
2012 Q32012 Q4
2013 Q12013 Q2
UKSMEF
SMEFM
43.0%
28.9%
5.9%
36.5%32.4%
38.1%35.3% 35.3%
33.6%40.7%
37.7%42.4%
79.6%
69.6%
55.9%
69.0%64.5% 67.6%
66.3%65.5%
61.8%66.8%
64.9%69.5%
84.0%
78.4%
68.8%
77.0% 75.9%72.5%
77.9%73.9%
69.3% 72.9%69.0% 72.9%
Perceived probabilities of making successful applications
Perceived success probability (DBs) Perceived success probability (all firms) Actual success probability
-8.9%
-16.3%
-13.9%
-16.9%
1.9%
-2.4%
-16.3%
-25.6%
-23.3%
-26.7%
-7.8% -7.5%
-12.6%
-21.0%
-18.6%
-21.8%
-3.0%
-5.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
Fairly satisfied Neither/nor Not very satisfied Not at all satisfied Media coverage ofbank lending
Experiences of peers
Satisfaction with bank Other effects
Impacts on gaps between perceived and actual success probabilities (% points)
Perceptions summary• Perceptions vary with the economic cycle.
– State of economy affects perceptions (govt. role in improving confidence?)
– Perceptions (for average SME if not DBs) may be currently self-correcting as confidence returns.
• Perceptions are very sensitive to levels of satisfaction with bank.– Even being less than very satisfied can worsen perceptions.– A key reason for dissatisfaction is previous rejection and how this
was handled (see qual. analysis).• Very marginal negative impact of media coverage.
– Not a primary cause of poor perceptions (see qual. analysis).• Negative experiences of business peers more significant
(see qual. analysis).
9.2%11.1%
21.7%
28.0%
-4.3%-2.2% -2.6%
0.9%
5.1%
12.0%
19.1%
0.0% 0.4%
11.7%
15.3%
-16.3%
-10.8% -10.9%
-5.2%
-10.5%
4.8%6.9%
4.6% 5.8%
16.7%
21.7%
-10.3%-6.5% -6.8%
-2.1% -2.7%
8.4%
13.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
Too
cost
ly
Has
sle
Secu
rity
requ
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ents
Term
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App
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App
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oth
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ank
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Ente
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Econ
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Deb
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Issues with application process Approach by bank about lending(pro-activity)
Awareness of support Other
Key impacts on application costs (% points)
0.5%
2.6%
-0.1% -0.4% -0.7%
-5.7%
-13.0%-14.0%
-6.3% -6.6%
-14.8%
-11.4%
-16.3%
-18.4%-17.4%
-18.6%
-26.8%
-29.8%
-24.7%
-34.3%
-7.2%
-4.4%
-8.2%-9.4% -9.1%
-12.2%
-19.9%-21.9%
-15.5%
-20.5%
-40.0%
-35.0%
-30.0%
-25.0%
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
1-2 years 2-5 years 6-9 years 10-15 years More than 15years
50K-74,999 100K-249,999 500K-999,999 2-4.9m 15-24.9m
Business age Sales
Firm impacts on application costs
Application costs summary• A number of issues related to the application process increase costs.
– Perceptions of security requirements/T&Cs in particular.• Being approached by a bank about lending significantly lowers
application costs. – Especially an approach by your own bank.
• Awareness of the Appeals Process makes applying seem more worthwhile.– Awareness of EFG to a lesser extent.
• Concerns about the economic climate raise perceived hurdles in applying. – State of economy affects perceived success and hurdles.
• Higher hurdles too for younger and smaller businesses.– Role for support agencies.
Emerging messagesImproving perceptions Lowering hurdles
Banks • Better customer service (handling of rejections?)
• Greater pro-activity (approaching businesses about borrowing needs).
• Support with issues in application process (perceived cost/security requirements/T&Cs).
• Raise awareness of appeals process.
Support agencies • Support (younger/smaller) businesses with applications.
• Raise awareness of appeals process.
Government • Policies need to improve business confidence (not just lower interest rates).
• Support (younger/smaller) businesses with applications.
• Improve economic climate.• Raise awareness of policies
designed to lower hurdles (e.g., EFGs).
Conclusions
• Reducing discouragement depends on both improving perceptions and lowering hurdles:– This matters because around 2/3rds of DBs might be
successful if they applied. – Evidence of self-correction as confidence in economy
returns (see next slide).• Existence/extent of DNBs merits further
investigation. – DBs may be just the tip of the iceberg.
• Over to Shiona for a closer perspective on DBs…
5.7
5.3
3.8
5.0 4.9 4.9
3.93.6
3.0
1.8
2.3
4.04.3
3.4
2.5
3.43.1
3.23.1
2.5
2.0
3.4
3.0
2.1
2.8
2.52.3
1.5 1.5 1.4
0.6
-2.1
0.40.6 0.7 0.6
-0.4
0.6 0.6
-0.1 0
-0.5
0.7
-0.2
0.3
0.7
-3
-2
-1
0
1
2
3
4
5
6
7
2004 Q4 2008 Q4 2009 Q4 2010 Q1 2010 Q2 2010 Q3 2010 Q4 2011Q1/2
2011 Q3 2011 Q4 2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2
Discouraged Borrowers: 2004-2013
DB any(%)
DB indirect(%)
DB direct(%)
GDP growth (%)
UKSMEF
SMEFM