Purpose: Small and medium-sized entities (SMEs) operating in the alternative financing sector are typically heterogenous in nature making them differ greatly from traditional banks. Where traditional banks must comply with strict banking regulations, developing uniform regulations for the alternative financing sector remains a challenge. This paper examines the current challenges and solutions from a sociological and institutional perspective in developing standards for SMEs operating in the alternative financing sector in the Netherlands. Adopting minimum quality standards should lead to increased transparency and public trust in the non-banking sector.
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According to various authors access to financing is one of the main limitations constraining further growth for small- and medium sized enterprises (SMEs). Hence, academics and policymakers showed great interest in the topic of access to financing for SMEs. Various researchers argued the competitive advantage of large traditional banks in SME lending over smaller institutions. These institutions with more market power may charge higher financing costs and apply stricter credit policies for SME clients further affecting credit availability. In the past decade, SME financiers have entered the market as a response to the market domination of these large institutions. These new parties must gain trust as they operate in a market that is not regulated. Where traditional banks must comply with strict banking regulations, developing uniform regulations for the alternative financing sector remains a challenge. This paper examines the current challenges and solutions from a sociological and institutional perspective in developing standards for SMEs in the alternative financing sector. Our study contributes to the SME finance literature as it is the first empirical study that explicitly examines the regulatory gap in SME financing through interaction with policymakers, SME entrepreneurs, traditional banks as well as SME financiers themselves. Note: this is a confidential paper, part of a Phd-program and awaiting publication (as per August 2024)
PurposeIn order to better understand how heuristics are used in practice, the authors explore what type of heuristics is used in the managerial domain of financial advisors to small and medium-sized enterprises (SMEs) and what influences the shaping of these heuristics. In doing so, the authors detect possible fast-and-frugal heuristics in day-to-day decision-making of independent financial advisers who help owners of SMEs to acquire capital (e.g. loans, factoring, leasing and equity).Design/methodology/approachThe authors inductively assessed the work of financial advisers of SMEs. Based on group discussions, the authors drew up a semi-structured interview-protocol with descriptive questions about how financial advisers come to a deal for their clients. The interviews of 19 professionals were analysed by relating them to the theory of fast-and-frugal heuristics.FindingsWithin their decision-making, advisers estimate the likelihood of acceptance by a few financial providers they know well in their personal network with a strong bias towards traditional banking products, although there are a large number of alternatives on the Dutch market. “Less is more” seems to be a relevant principle when defined as satisficing. Heuristics help advisers to deal with behavioural and economic limitations. Also, the authors have found that client interaction, previous working experience and the company the adviser is working for influences the shaping of the simple rules the adviser is using.Research limitations/implicationsThe study shows how difficult it is to understand the ecological rationality of a certain group of professionals and to understand the “less is more” principle. Financial advisers to SMEs use cognitive shortcuts and simple rules to advise SME-owners, based on previous experiences, but it is difficult to determine whether that leads to the same or even better solutions for them and their clients than using probability theory and financial optimisation models. Within heuristics, satisficing seems to be a dominant mechanism. Here, heuristics help advisers in recognising possibilities by searching for similarities between a current financing case and previous experiences. The data suggests that if “less is more” is defined as satisficing for one or more stakeholders involved, the principle dominates the decision making of financial advisers of SME's.Practical implicationsThe authors suggest the relevance of a behavioural approach to finance by assessing the day-to-day decisions of financial advisers of SMEs. Also, the authors suggest that financial advisers are guided by previous experiences, and they do not fully assess a wide range of options in their work but need shortcuts to fulfil the needs of their clients.Originality/valueThe study comes close to day-to-day decision-making in finance by assessing how professionals make decisions. The authors try to understand types of heuristics in relation with “ecological rationality” and the less is more principle. The authors assess financial advisers of SME-companies, a group that has gotten little research attention until now. The influence of client interaction and of the company the adviser is working for is remarkable in the shaping of the advisers' simple rules.
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