Abstract
Access to external finance is a key challenge for the creation, survival and growth of SMEs. This article delves into the “weak funding” handicap of rural small firms (SEs): the access to bank financing and the substitutive role of trade credit for entrepreneurs in rural areas when they faced bank credit constraints. Considering SEs in Galicia (Spain), a paradigmatic case in Europe of rural areas in demographic decline with a strong impact of the Spanish sovereign and banking crisis of 2008–2012. There’s evidence of firms in rural areas facing a differential negative flow of bank credit during the financial crisis, especially in the manufacturing and construction sectors, that dissipated afterwards. Then, using a panel data approach that considers the determinants of trade credit, the complementary and substitutive hypotheses are tested to estimate the impact of bank credit restrictions over trade credit.
Highlights
Half the World’s population lives in cities today
The descriptive analysis provided some intuition that the hypothesis of a differential bank credit constraint for firms operating in rural areas is correct, while the effects in terms of net trade credit are not obvious
SEs operating in rural areas often lack of sufficient access to capital
Summary
Half the World’s population lives in cities today. In Europe, the increasing urbanisation is a reality, but rural Europe is yet home to more than half of the population and covers more than three quarters of the territory. Fostering entrepreneurship and business development of micro, small (SEs) and medium enterprises (SMEs) is a key target in the Europe2020 strategy, but SEs in rural areas face drawbacks such as dealing with lower demand and less favourable ecosystems, worse infrastructure and administrative burdens, weaker innovation abilities, and lack of access to private and public capital (Erjavec & Rickson, 2016). Bank lending to SMEs was reduced significantly after the financial crisis: from 2008 to 2011, by 47% in the EU, varying from 21% in Italy to 82% in Ireland (McGuinness & Hogan, 2016) In this context, the access to financing by SEs in rural areas of Europe has been barely studied. Palacín et al (2019) find that the substitutive relation between trade credit and bank credit works better in countries with more efficient banks This was rarely studied in relation to the rural setting in which firms operate. Friedline et al (2020) analyse whether Fintech help to expand access to financial services in rural areas of the U.S most of this research is again oriented to emerging economies – e.g., Kohardinata et al (2020) for Indonesia; Siddiqui and Siddiqui (2020), in India
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