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How have SME finances been affected by the credit crisis?*

How have SME finances been affected by the credit crisis?*. BERR/ESRC Seminar: SME Access to Finance 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.

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How have SME finances been affected by the credit crisis?*

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  1. How have SME finances been affected by the credit crisis?* BERR/ESRC Seminar: SME Access to Finance 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. Context • ‘Over the last 18 months, and with increasing intensity over the last 6, the global financial system has suffered its greatest crisis in more than 70 years.’ Financial Risk Outlook, 2009: FSA. • FSB report… • Almost half it’s members have found it harder to gain access to finance in 2008: ‘The banks are upping the ante, they want guarantees of fixed assets, houses – they won’t take any kind of risk’. Stephen Peters (start-up bike-shop entrepreneur): The Guardian, 3/1/2009. • Small firms affected by interest rate hikes and poor treatment despite good credit histories: ‘3 years ago [the interest rate] was 4.5% above the base rate but has risen to 11% above the base rate’. • Inconsistent behaviour by banks (strategic vs branch level): ‘It [a £1bn HSBC small firms fund] is all rhetoric…I am not very hopeful’. Stephen Peters (commenting that his bank’s lending criteria had not changed). • BBA report… • Small business lending growing up to Sept 2008: overdraft lending up 4% over the year (but falling in Oct/Nov 2008); term lending up 10% (levelling out in Oct/Nov 2008). • Who’s right?

  3. UKSMEF 2008 • Fieldwork 10th Sept – 20th Nov 2008. • 2,500 SMEs (up to 250 employees) interviewed in detail about the business/owner, sources of finance and financial relationships. • Follow up to previous UKSMEFs in 2004 and 2007.

  4. Hypotheses • H1: Tightening of lending criteria has led to an increased likelihood of loan rejection in 2008. • Riskier firms (start-ups, poor credit ratings, fewer assets, less experienced owners etc.) most affected. • H2: SMEs have a higher likelihood of default in 2008. • Tightening of lending criteria leading to lack of finance (e.g., working capital) and an increased risk of insolvency. • Effect of credit crisis on real economy (reduced demand). • Increased PD leads to higher capital requirements under ‘pro-cyclicality’  further tightening of new lending.

  5. Credit crisis and recession affecting business problems…

  6. and SMEs are more likely to default in 2008…

  7. Summary analysis of changes between 2004 and 2008 in… • Use of financial products • Capital demands • Loan rejection rates • Discouragement rates

  8. Lower use of financial products in 2008…

  9. This reflects a fall in demand…

  10. and a rise in rejection rates…

  11. Also, a significant increase in discouragement…

  12. Multivariate analysis: impact of the credit crisis on loan rejection rates • Amongst firms with capital demands, compare rejection rates for loan applicants in 2008 with otherwise identical non-applicants in 2008 (the counterfactual). • Analysis controls for: turnover; assets; business age; sector; DB risk rating; region; main provider of finance (BIG 4 or other); owner's business experience; gender; and ethnicity. • The difference in rejection rates is a measure of the impact of the credit crisis. • Measures the change in the likelihood of rejection, for a given type of firm, in 2008. • Analyze multiple impacts of the credit crisis depending on the type of firm.

  13. Impacts of the credit crisis: overdrafts • Average SME 23% (1.8% pts) more likely to be rejected in 2008 (7.6% (pre-2008) 9.4% (2008)). • Most affected firms/entrepreneurs (% more likely to be rejected): • High risk rating (39%) • Low assets (£10K) (72%) • High credit demands (sales=£10m) (139%) • Low business experience (1 year) (466%) • Big 4 banked (65%) • Female owned (112%) • Manufacturer (460%) • Retailer (231%) • Unaffected firms: • Low risk rating • Assets of £500K or above • Low credit demands (sales of £100K or less) • High business experience (15 or more years)

  14. Impacts of the credit crisis: term loans • Average SME 140% (6.7%pts) more likely to be rejected in 2008 (4.8% (pre-2008)11.5% (2008)). • Most affected firms: • High risk rating (194%) • Start-ups (694%) • Black owned (480%) • Low assets (£10K) (375%) • Real Estate, Renting and Business Services (520.1%) • Hotels and Restaurants (223%) • Least affected firms: • Low risk rating (65%) • Assets of £5m or above (0%) • Manufacturer/retailer (0%)

  15. Conclusions • Availability of both overdrafts and term loans affected by the credit crisis: • Term loans most affected. • But no evidence that banks have ‘stopped lending’: rejected firms still in the minority. • Firms/entrepreneurs most affected by the credit crisis: • Low assets (lack of collateral). • High credit demands. • Poor credit ratings. • Low business experience/start-ups. • Insolvencies likely to increase further in 2009 • This may reduce lending further under ‘pro-cyclical’ capital adequacy rules. • Turner Review considering new rules on capital adequacy.

  16. Serious consequences of loan rejection in 2008…

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