Does relationship lending help firms to ask for credit? European cross-country evidence

Relationship lending is well known to allow SMEs to obtain credit, however one of the most crucial obstacles for these firms is not obtaining credit but applying for credit in the first place. We explore how relationship lending impacts the demand for credit, i.e., borrower's discouragement. Using a European cross-country survey of more than 2300 firms in 2010, we show that firms that rely on relationship lending to get access to credit refrain from applying in the first place. We show that this result is due to a self-rationing mechanism: riskier firms employing relationship lending tend to be more discouraged. Instead, the use of transactional lending reduces discouragement, and this effect does not depend on firms' risk. Our results suggest that firms employing relationship lending know their own likelihood of rejection better and can decide when not to apply.