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This study examines whether knowledge about a borrower’s internal audit function affects commercial lending decisions. An experiment was conducted with 61 lending officers, who provided risk assessments and lending probabilities for a hypothetical line of credit applicant. The independent variable, the company’s internal audit function, was manipulated using three levels—no internal auditing, weak internal auditing, and strong internal auditing. Results show that lenders’ risk assessments are not influenced by a borrower’s internal audit function, but the likelihood of approving a line of credit is positively impacted. More specifically, for a borrower whose financial statements are compiled by a regional CPA firm, the existence of an internal audit function enhances the probability of line of credit approvals, although the strength of the internal audit function does not appear to have an impact. An implication for companies that want to enhance their borrowing prospects is that it may be worthwhile to invest in some form of internal auditing, but they do not have to be very concerned about its strength for purposes of obtaining lines of credit from banks.

How does the COVID-19 affect SMEs’ financing in emerging markets? In this paper, we investigate the impact of the COVID-induced shock on Chinese SMEs’ line of credit (LOC) using deal-level data. As Hubei province was mostly affected, we employ a difference-in-differences approach with the propensity score matching (PSM-DID) and compare Hubei SMEs’ credit responses before and after the outbreak relative to those of non-Hubei SMEs. Our results suggest that Hubei SMEs’ credit demand reduced significantly compared to that of non-Hubei SMEs, and the adverse effects were more pronounced for the non-state-owned enterprises (non-SOEs) and the SMEs without prior bank relationships. Moreover, we show a negative impact on non-Hubei SMEs having supply chain relationships with Hubei province. Such effects rippled through the supply chain and exerted an intensified strike on the SMEs with Hubei customers. Finally, we find the state-owned banks eased the LOC to Hubei SMEs during the pandemic outbreak. Chinese SMEs’ credit demand deteriorated after the COVID-19 outbreak, though supported by the state-owned banks. How does the COVID-19 affect SMEs’ financing in emerging markets? In this paper, we investigate the impact of the COVID-induced shock on Chinese SMEs’ line of credit (LOC) using deal-level data. As Hubei province was mostly affected, our results suggest that Hubei SMEs’ credit demand reduced significantly compared to that of non-Hubei SMEs, and the adverse effects were more pronounced for the non-state-owned enterprises (non-SOEs) and the SMEs without prior bank relationships. Moreover, we show a negative impact on non-Hubei SMEs having supply chain relationships with Hubei province. Such effects rippled through the supply chain and exerted an intensified strike on the SMEs with Hubei customers. Finally, we find the state-owned banks eased the LOC to Hubei SMEs during the pandemic outbreak. According to our study, government COVID-supportive policies should target the SME subgroups such as non-SOEs, firms that heavily rely on supply chain, and those without stable bank relationships.

Before the twentieth century, personal debt resided on the fringes of the American economy, the province of small-time criminals and struggling merchants. By the end of the century, however, the most profitable corporations and banks in the country lent money to millions of American debtors. How did this happen? The first book to follow the history of personal debt in modern America,Debtor Nationtraces the evolution of debt over the course of the twentieth century, following its transformation from fringe to mainstream--thanks to federal policy, financial innovation, and retail competition. How did banks begin making personal loans to consumers during the Great Depression? Why did the government invent mortgage-backed securities? Why was all consumer credit, not just mortgages, tax deductible until 1986? Who invented the credit card? Examining the intersection of government and business in everyday life, Louis Hyman takes the reader behind the scenes of the institutions that made modern lending possible: the halls of Congress, the boardrooms of multinationals, and the back rooms of loan sharks. America's newfound indebtedness resulted not from a culture in decline, but from changes in the larger structure of American capitalism that were created, in part, by the choices of the powerful--choices that made lending money to facilitate consumption more profitable than lending to invest in expanded production. From the origins of car financing to the creation of subprime lending,Debtor Nationpresents a nuanced history of consumer credit practices in the United States and shows how little loans became big business.

Many Americans approach retirement in poor financial condition: the median American older than age 50 has few financial assets and a mortgage balance. But typically they have home equity. Monetizing this equity is important for achieving a decent living standard in old age. This article discusses the benefits of two instruments older adults could use to convert home equity into cash: the home equity line of credit, and the reverse mortgage, often known as the home equity conversion mortgage. It discusses the challenges involved in making these products sustainable.

Using a unique proprietary dataset from a large European commercial bank containing granular loan-level information on credit lines to mid-corporate firms, we investigate the bank’s decisions to allow firms to retain existing credit at a time of acute financial instability. Our results highlight the importance of bank-firm relationships during crisis times. Existing borrowers who actively used their credit lines were not rationed, unless they posed an increased credit risk. We do not find evidence of evergreening practices.

Vendor credit line (VCL) is a common instrument to fund retailers with capital constraints, wherein a supplier extends credit for a retailer’s purchases and limits credit size for the sake of default risk. Our study investigates the operational and financial decisions in a supply chain consisting of a supplier and a capital-constrained retailer, wherein the supplier sets credit limits for the retailer’s ordering, and then examines the financing choice between VCL and bank loan. We derive the equilibrium credit limits, order quantity and financing mode and conclude that, the credit limits linearly increase with the capital level, and both credit limits and capital level are decisive to the order quantity and financing mode. In the illustrating examples, we identify the decision regions contingent on critical fractiles under different demand distributions (e.g., normal, uniform and exponential) and find the financing choice hinging on the supplier’s profit margin if the capital level stays low, otherwise VCL dominates. Finally, sensitivity analysis on key parameters is employed, suggesting that VCL is more preferable as the wholesale price increases or as the retail price and production cost decreases.

SMEs are the main drivers of economic development. As the debt crisis and coronavirus crisis show, despite their importance, they are extremely sensitive to economic downturns. Therefore, SMEs need to be supported through various tools. The paper is aimed at evaluating the SMEs’ bank and governmental support in the northern and southern EU countries in two crisis periods and assessing the financial state of SMEs on the eve of coronacrisis using micro-level data. It was proved that bank loans and credit lines remain the main sources of SMEs’ financing. After the debt crisis, banks are becoming more loyal to SMEs.It was proved that SMEs from the northern EU countries suffered less from the previous crisis and therefore started their recovery earlier than the southern ones in terms of profitability, liquidity and debt burden. In addition, it was shown that both groups on the eve of the new turbulence period were in better financial state compared to the previous debt crisis. The southern EU countries suffered more from both crises. At the same time, due to effective governmental support and bank loyalty, their SMEs entered the coronacrisis at the same level of financial stability as the northern ones. Since the new support measures are concentrated primarily in the banking sector through loan guarantee schemes and reduced interest rates, it is essential to provide debt financing to high-quality borrowers and avoid the debt crisis in southern counties.

In this study, we focus on manufacturing firms in Eastern Europe and Central Asia and examine the impact of the 2008-2009 Global Crisis on these firms’ accounts, overdraft facilities, and loans. Our objective is to see if the crisis affected the number of manufacturing firms that have a checking/savings account, that have an overdraft facility, or that have a line of credit/loan. We also want to see whether firms changed the type of financial institution that they borrowed from (i.e. private commercial bank, state-owned bank/agency, or non-bank financial institution). Our results show that, post-crisis, a significantly lower percentage of manufacturing firms had an overdraft facility. Also, post-crisis, a significantly lower percentage of firms had a line of credit/loan. On the other hand, there was no significant change with respect to the % of firms having a checking or a savings account. Also, there was no significant change with respect to the percentage of firms borrowing from a private commercial bank, a state-owned bank/agency, or a non-bank financial institution. Overall, we conclude that, after the crisis, financial institutions in the region significantly cut their credit facilities to manufacturing firms while firms continued to transact with the same institution or a similar institution.

In this paper, we design a supply chain financing (SCF) system with a manufacturer, a retailer and a commercial bank where the retailer is capital constrained under demand uncertainties. We formulate a multi-level Stackelberg game in which the manufacturer acts as the leader and the bank as the sub-leader. Considering the bankruptcy risks of the retailer, we analyze the optimal credit line for the commercial bank, the optimal order for the retailer and the optimal wholesale price for the manufacturer, respectively. Comparing the benchmark scenarios of no capital constraint and constrained capital without financing, interdependencies between the operational and financial decisions are explored, as well as coordination analysis of the wholesale price contract with different credit lines. Finally, by conducting numerical studies, interactions between the operational and financial decisions and the impacts of credit lines on contract coordination are illustrated. The results validate our theoretical analysis. Our analysis suggests that a suitable financing scheme with limited credit would motivate the capital-constrained retailer to order more and the wholesale price contract with finite loans would achieve coordination in the SCF system.