Relations with Lenders and Enterprise Complexity in SMEs

Abstract

Differences in financial behaviour are explained in the literature by reference to the theory of asymmetrical information, and in particular to the concept of information opacity. The same literature indicates that because SMEs are an opaque type of company, they tend to have relational financial dealings with banks (relationship banking) which allow access to private, exclusive information, thus enabling the bank to cover the hold-up costs associated with information processing. This paper postulates that within the aggregate of SMEs, there are different models of relations between lender and enterprise, based on both opacity and transparency of information. Within the set of SMEs, the companies that adopt transactional banking and market models are associated with the concept of complexity, which denotes intrinsically opaque companies from which lenders request public information. Conversely, those which adopt financial models that mainly focus on developing relationship banking, with the Finance Department playing a fairly marginal role, are classed as simple companies, for which banks adopt an asset-based lending approach involving privileged access to corporate information. This theory was tested on a sample of 1,891 SMEs extracted from the database of the 8th Capitalia survey of manufacturing companies. The study confirmed the existence of four different models of financial behaviour and an association, in the terms set out above, between those models and the level of information transparency, measured in terms of intensity of enterprise complexity and characterised by five distinct groupings. The main finding that emerged is the inadequacy of banks' reliance on size to segment their small and medium-sized corporate customers; they should consequently adopt behavioural segmentation criteria based on the ability to discriminate the level of corporate complexity in order to develop a supply system which is really suited to the characteristics of the chosen SME target.