Financial constraints in lines of credit: the role of growth opportunities for vulnerable European SMEs

Purpose We aim to compare the effect of borrower discouragement and credit rejections associated with lines of credit (LOC) on growth opportunities for small- and medium-sized enterprises (SMEs). We also intend to improve the knowledge about overdrafts and credit lines whose problems and benefits are yet to be fully understood. Finally, we aim to determine whether growth opportunities of vulnerable firms are, compared to those of non-vulnerable firms, more deeply affected by financing constraints. Design/methodology/approach We analyze the effect of credit rejected and discouraged LOC borrower on the likelihood of firms’ growth opportunities and the moderating effect of the vulnerability of the firm using a two-level random intercept logistic regression model. We use a sample of more than 13,000 SMEs operating in 25 European countries. Findings Our results show that firms without access to LOC facilities are less likely to experience growth. We show that current employment growth is especially sensitive to credit rejections while future turnover growth reacts more intensely to borrower discouragement. We also find that employment growth deteriorates more intensely due to credit rejections in vulnerable firms than in non-vulnerable ones. Originality/value To the best of our knowledge, this is the first contribution that compares the effect that credit rejection and borrower discouragement have on growth opportunities for SMEs. We also contribute to the limited knowledge about discouraged LOC borrowers. This knowledge is of great value for credit institutions because the flow of debt capital toward SMEs depends on these companies not being discouraged from applying for the resources they need.