Small Business Economics

, Volume 38, Issue 4, pp 399–418 | Cite as

The latent demand for bank debt: characterizing “discouraged borrowers”

  • Mark FreelEmail author
  • Sara Carter
  • Stephen Tagg
  • Colin Mason


Concerns that small firms encounter credit constraints are well entrenched in the literature, despite widespread empirical evidence that a relatively small proportion of small firms have their loan applications rejected. However, many firms may be discouraged from applying for fear of rejection. These businesses are the focus of this paper. Based on responses to a large-scale postal survey of UK small and medium-sized enterprises (SMEs), we find that twice as many businesses were discouraged from applying for a bank loan than had their loan request denied. More particularly, we observe a number of distinguishing characteristics of “discouraged borrowers” (relative to applicants). These include: strategy, sector, prior entrepreneurial experience and banking relationships. The implications of our findings for policy and future research are briefly discussed.


Small firms Funding gap Banks Loan finance Loan denial Discouragement 

JEL Classifications

G21 M10 L26 



We are grateful to the editor and two anonymous reviewers of earlier drafts of the manuscript, whose comments and guidance greatly improved both the technical aspects of the paper and conceptual framing of our work. Nonetheless, any errors remain our own.


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Copyright information

© Springer Science+Business Media, LLC. 2010

Authors and Affiliations

  • Mark Freel
    • 1
    Email author
  • Sara Carter
    • 2
  • Stephen Tagg
    • 2
  • Colin Mason
    • 2
  1. 1.University of OttawaOttawaCanada
  2. 2.University of StrathclydeGlasgowScotland

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