Financing of small and medium enterprises (SMEs): Determinants of bank loan application

The main focus of this paper is to answer the question, ‘what are the factors that determine a SME to apply for a bank loan?’ Four elements namely human capital, firm, business strategy and information asymmetry underlie this study’s theoretical framework. The main objective of the paper is to develop a bank loan model based on applicability. The model was developed using quantitative method coupled with a hypothetical-deductive testing approach, applied on primary data on loan applications gathered from the questionnaires. The logistic regression tests indicate that the business experience of a firm’s owner does not have a significant relation with the firm’s tendency to apply for a bank loan. The educational background of the firm’s owner, the firm’s size, collaterals and loans with interest were found to be negatively related to its tendency to apply for bank loans. However, the firm’s business plans and start-up relationship with bankers were found to be positively related to the firm’s applying bank loans. Key words: SME bank loan application, education and experiences, firm size, business plan, collaterals, loan with interest, Libya.