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SME Sources of Funding: More Capital or More Debt to Sustain Growth? An Empirical Analysis

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Access to Bank Credit and SME Financing

Abstract

This chapter investigates funding sources available to SMEs as a means of understanding whether difficulties in accessing bank credit stem from the characteristics of the SMEs applying for financing. Based on creditworthiness measures applied to over 500,000 yearly financial statements of euro area SMEs in the 2006–2014 period, we find that the credit crunch experienced by SMEs stems from excessive leverage requirements. However, our analysis shows that more equity is necessary for growth and confirms that an expansionary monetary policy, even based on extremely low or negative interest rates, may not lead to more credit being extended to smaller companies if they are already highly geared; and that a successful policy must be complemented by interventions aimed at improving SME’s access to equity finance.

JEL classification: L1, O1, G21

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Notes

  1. 1.

    ‘The supply constraints refer to those factors that make it difficult for financial institutions like banks to lend (supply loans) to SMEs, including higher levels of informational asymmetries related to SME lending, higher transactional costs, the inherently riskier nature of SMEs and institutional weakness in developing countries that make it more difficult for financial institutions to lend to SMEs.’ Abor et al. (2014).

  2. 2.

    In 2014, SMEs accounted for 99.8% of all enterprises in the non-financial business sector in the EU28 (European Commission 2015b). They also account for 60% of turnover and 70% of employment (European Central Bank 2015a).

  3. 3.

    ‘The rationale for the SF is also based on the fact that capital requirements could be one of many factors affecting lending decisions. The capital relief resulting from the application of the SME SF led to an increase of 0.16 percentage point of an average CET1 ratio of 13.1% (weighted). The increase goes up to 0.21 percentage point if we consider only credit RWAs. In absolute terms, the application of the SME SF means that, in total, the minimum required capital has been reduced by approximately EUR 11.7 billion as of the third quarter of 2015’ (European Banking Authority 2016).

  4. 4.

    A lot of SMEs don’t get all the financing they ask from banks in Europe [...] It is more costly for SMEs to get a loan from a bank than for bigger companies, especially in countries worst hit by the crisis.” European Commission 2015a), Capital Markets Union and SMEs in the EU, 30th September.

  5. 5.

    Note that the European Union Recommendation 361/2003 definition is not perfectly consistent with the Eurostat data quoted in the introduction because Eurostat only considers number of employees. According to the Eurostat definition, micro enterprises are those companies with less than 10 persons employed; small enterprises are those with 10–49 persons employed, medium-sized enterprises are those with 50–249 persons employed, and large enterprises are those with 250 or more persons employed.

  6. 6.

    Classified as of NAICS 81 ‘Other Services (except Public Administration)’. It comprises establishments engaged in providing services not specifically provided for elsewhere in the classification system.

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Authors and Affiliations

  1. Faculty of Economics, Sapienza University of Rome, Rome, Italy

    Marina Brogi & Valentina Lagasio

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  1. Marina Brogi
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  2. Valentina Lagasio
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Correspondence to Marina Brogi .

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Editors and Affiliations

  1. Department of Economics and Business, University of Cagliari, Cagliari, Italy

    Stefania Rossi

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Brogi, M., Lagasio, V. (2017). SME Sources of Funding: More Capital or More Debt to Sustain Growth? An Empirical Analysis. In: Rossi, S. (eds) Access to Bank Credit and SME Financing. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-41363-1_7

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  • DOI: https://doi.org/10.1007/978-3-319-41363-1_7

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