Extending credit to small and medium size companies

Abstract

PurposeFunding small- and medium-sized enterprises (SMEs) may be especially valuable in China to stimulate innovation and its emerging market economy. These firms have been advised to build on the Chinese value of guanxi to manage conflicts and develop relationships with banks. This study aims to explore the nature of relationships that help SMEs inform banks and convince them to provide credit.Design/methodology/approachAs this study’s theorizing is about whether banks and firms that manage their conflicts for mutual benefit set the foundation for bank’s confidence in extending credit, therefore, both the bank officers and the company managers were asked to provide information for the study. In total, 106 pairs of bank officers in the loan department of four banks and SME managers in Shanghai, China, completed a questionnaire survey for this study.FindingsResults support the argument that marketing research on customer orientation and organization behavior research on conflict management identify how to develop effective marketing relationships between SMEs and banks in China. Banks that were customer-oriented laid the groundwork for managing conflict cooperatively and not competitively with borrowing firms. Cooperative conflict management in turn was found to convince banks that they could confidently provide credit and to convince borrowers that their transaction costs will be reasonable.Originality/valueThis study identifies that developing guanxi and the capacity to manage conflict cooperatively are an important foundation for providing credit to SMEs in China.