Abstract

Not all small businesses with potentially good investment opportunities will apply for external finance even if they need it. Those discouraged from applying as they fear rejection, namely ‘discouraged borrowers’, represent an interesting but under-researched group of firms in the small business literature. In this study, we question whether these entrepreneurs were correct in their assumptions about being rejected for loans. In particular, we seek to investigate what really happens to small business lending when an economic downturn occurs, and how do such unfavourable economic events impact on the willingness of entrepreneurs to continue making loan applications even if they perceive that profitable investment opportunities are available.

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