Abstract
Evidence from business shows that small- and medium-sized enterprises (SMEs) are fragile. They suffer from a high mortality rate that primarily owes to difficulties in securing financing as a result of major information asymmetries. Despite these difficulties, SMEs provide the economic backbone of all economically developed countries. Aware of the key role of SMEs in national economic stability and of the financial problems that SMEs face, governments have designed a range of financial and tax measures to protect them. These financial measures include a highly specific form of public financing called subordinated debt. This concept refers to debt with the lowest credit seniority, just before equity. Subordination makes sense when companies go into liquidation because subordinated debt creditors are the last creditors to receive repayment, making recovery of this debt virtually impossible. Therefore, the risk borne by lenders of subordinated debt is similar to that of shareholders of the borrowing firm. This paper presents an ordinary least squares regression model to estimate the cash flows of SMEs financed by public subordinated debt. This provides public authorities with a tool to estimate the ability of SMEs to repay their debt and to thereby ensure that public subordinated debt financing is sustainable.
Highlights
Small- and medium-sized enterprises (SMEs) have traditionally been held captive to bank debt because of their limited ability to access capital markets
The aim of this paper is to present a tool for private and public providers of participation loans (PLs) to estimate future cash flows of growing SMEs financed by PLs
Because this type of loan is similar to private equity, we drew upon studies by Driessen, Lin, and Phalippou [25], Robinson and Sensoy [26], and Ang, Chen, Goetzmann, and Phalippou [27]. Based on this theoretical background and our research objectives, we propose the following hypothesis: Hypothesis: Variations in noncurrent assets, sales, EBITDA, return on assets (ROA), and the number of employees are factors that determine the increase in cash flow of companies financed using PLs
Summary
Small- and medium-sized enterprises (SMEs) have traditionally been held captive to bank debt because of their limited ability to access capital markets. In Spain, participation loans (PLs) are regulated by Royal Decree-Law 7/1996 of 7 June and by Law 16/2007 of 4 July Both laws define the legal characteristics of PLs, which include subordination, interest that is linked to the performance of the borrowing firm, and equity-like credit seniority once the company goes into liquidation. Through analysis prior to providing this financing, it is possible to estimate SMEs’ ability to repay the loan and determine the viability of the transaction This tool can thereby help ensure the sustainability of public financing through PLs. This study contributes to the literature by being the first to provide an econometric model to estimate the cash flows of SMEs financed by PLs and, by extension, by subordinated debt.
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