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Small Firms in the Credit Crisis: Evidence from the UK Survey of SME Finances*

This presentation discusses the effects of the credit crisis on small and medium-sized enterprises (SMEs) in the UK. It analyzes the demand and supply of finance for SMEs and examines the changes since 2004. The presentation also explores the higher rejection rates, increased loan amounts, and higher costs of capital for SMEs.

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Small Firms in the Credit Crisis: Evidence from the UK Survey of SME Finances*

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  1. Small Firms in the Credit Crisis: Evidence from the UK Survey of SME Finances* Presentation to CBI SME Council 7th July 2009 Dr. Stuart Fraser Centre for Small and Medium Sized Enterprises Warwick Business School *This research was funded by ESRC grant no. RES-177-25-0007 and with support from Barclays Bank.

  2. Introduction • UKSMEF. • Analysis. • Demand and supply of finance. • Changes since 2004. • Effects of the credit crisis. • Interpretation.

  3. UKSMEF (aka ‘BIG’) • Representative sample of 2,500 SMEs (<250 employees) interviewed in detail about: • The business and its owner. • Sources of finance. • Financial relationships. • UKSMEF 2008 a follow up to previous UKSMEFs in 2004 (WBS) and 2007 (Cambridge). • Latest fieldwork 10th Sept – 20th Nov 2008. • Analysis compares outcomes in 2005-8 (and among 2008 applicants in particular) with 2001-4.

  4. Lower use of financial products in 2005-2008…

  5. (…and greater use of internal finance…)

  6. Partly due to lower capital demands…

  7. …but also higher loan rejection rates… • Compared to 2001-4… • Overdraft rejections up 3½ in 2008 (4.2%15.3%) • High risk: up 4 (5.8%22.4%). • Low risk: down¾ (3.8%2.8%). • High growth: up 4 (4.5%19.2%). • Term loan rejections up 2½ in 2008 (6.1%16.3%) • High risk: up 3½ (3.7%13.5%). • Low risk: down¾ (9.3%7.2%). • High growth: up 2½ (7.2%19%) • What underlies these increases?...

  8. …SMEs are riskier in 2008.

  9. Loan amounts • Average size of overdraft facilities loans up by 30% in 2008 (£36.5K£47.5K): • High risk: down¼ (£58K£14.5K). • Low risk: up 6 (£23.5K£145K). • High growth: down2/3 (£52K£34K). • Average size of term loans up 79% in 2008 (£102K£183K): • High risk: down½ (£153K£71K). • Low risk: up 3 (£86K£262K). • High growth: down 8% (£140K£128.5K).

  10. Margins and collateral • Overdraft margins up 83% (2.4% points 4.4% points over base). • Overdraft arrangement fees up 86% (£237£442). • Term loan margins up 68% (2.2% points 3.7% points over base). • Term loan arrangement fees up 37% (£1,074£1,468). • No change in average incidences of collateral. • But 78% increase (33.3%59.4%) on overdraft collateral among low risk firms. • Also notice an increase in rejections due to no/insufficient collateral…

  11. Interpretation • Higher rejection rates consistent with anecdotal evidence at the end of 2008 (e.g., from FSB). • UKSMEF 2008 shows high risk/high growth firms among the worst affected. • Higher loan amounts is consistent with BBA statistics for 2008. • UKSMEF 2008 shows that main beneficiaries of these increases were lower risk firms. • Lower loan amounts among high risk and high growth firms. • Credit has become increasingly concentrated in lower risk firms. • Higher risk and growth firms more likely to be offered smaller amounts or denied loans altogether.

  12. Interpretation • All types of firm paying higher margins due to higher cost of capital. • Hikes in arrangement fees seem less justified. • Lower risk firms having to offer more collateral to maintain good supply of credit. • And more firms report being denied loans due to no/insufficient collateral. • By comparison rejection rates for leasing/hire purchase agreements are lower in 2008…

  13. Conclusions • 2001-4 (credit boom) and 2008 (credit crisis) represent two extreme market states. • Boom conditions not sustainable; depths of crisis not sustained. • However UKSMEF 2008 points to an SME credit market in which credit will be less easily available. • Even to creditworthy firms if they lack collateral. • Stronger argument for the role of govt support • Hard pressed to justify SFLGs in UKSMEF 2004. • Not hard to justify EFGs at the current time. • Further evidence on the new credit market ‘equilibrium’ required to assess the scale/role of future interventions. • More fieldwork planned for start of 2010.

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