The Provision of Finance to Small Businesses: Does the Banking Relationship Constrain Performance

The beneficial economic effects of entrepreneurial activity can only be realised if such activity is relatively unconstrained in both product and factor markets, finance has been widely identified as a potential constraint on entrepreneurial activity due to either debt or equity gaps. However, in terms of externally supplied finance, it is arguably the availability of debt which is of greatest signifi­cance to most entrepreneurs. Given the inevitable information problems associated with the provision of debt finance, the nature of the relationship between bank and entrepreneur can be of considerable importance in ensuring the appropriate financing decisions are made. This paper examines the link between the banking relationship and the extent to which entrepreneurs are constrained by financing arrangements. Empirical analysis of the extent to which the banking relationship constrains performance suggests that there is no significant difference between more and less successful entrepreneurs.