Small And Medium-sized Enterprises Loan Research Articles

Proactive legal design—making sustainability visible and monitorable in SME loan agreements

According to the European Commission's Sustainable Finance Strategy, the financial system has a key role to play in promoting sustainable development toward a greener and more sustainable economy. Small and Medium-sized Enterprises (SMEs) represent over 99% of all European businesses and are responsible for around 60% of all business greenhouse gas emissions. Small and Medium-sized Enterprises are therefore crucial to the success of the European Union's sustainability transition. The share of sustainable finance for SMEs will grow both as a result of increasing sustainability legislation and the expectations of customers and stakeholders. However, integrating sustainability can be challenging for SMEs due to limited resources and expertise. The article highlights the importance of clear, transparent, and implementable contract documents as tools to enhance sustainability in financing. Proactive contracting and legal design approaches are discussed as means to transform contracts into management and communication tools, to promote sustainable business practices.

Explore the Impact of China Fintech Loans on the Financing of SMEs

As an important part of the economy, small and medium-sized enterprises (SMEs) play an important role in the recovery of the economy after the epidemic, but the financing difficulties of SMEs have been exposed but not solved. Fintech is the core force to practice inclusive finance and an important breakthrough to improve the financing constraints of SMEs. Fintech loans rely on big data to conduct credit evaluation and risk management for SMEs and play an important role in expanding corporate financing channels, accelerating loan efficiency, and reducing financial discrimination. First, this paper summarizes the financing status of SMEs in China and then subdivides Fintech loans. From the perspectives of bank Fintech loan use and Fintech loan company development, this paper presents the impact of Fintech loans on SME loans and the relationship between different Fintech loans and summarizes the shortcomings of Fintech loans in resolving the financing problems of SMEs. Finally, based on the current research status and objective reality, it provides suggestions for future research directions.

Influence of access to finance on the competitive growth of SMEs in Lesotho

BackgroundAccess to finance has been identified as one of the biggest problems faced by small and medium-sized enterprises (SMEs) in most developing economies. Similarly, access to finance has been identified as a dominant constraint facing the SME sector in Lesotho. This paper established the factors related to access to finance that influence the competitive growth of the SME sector in Lesotho. The factors that were identified include financial information access, bank and business support services, the structure of banks, and the collateral requirements of the financial sector.FindingsThe results from our analysis indicated that a relationship exists between the independent variables of financial information access, bank and business support services, the structure of banks, and the collateral requirement by commercial banks. As such these independent variables are associated with SMEs’ capacity to attain competitive growth in Lesotho. Explicitly, the results indicated that Basotho entrepreneurs and managers see the predictors (collateral requirement, financial information access, and bank and business support services) as critical factors of access to finance that constrain most enterprises from accessing the necessary credit from banks, which ultimately influence the SMEs’ capacity to attain competitive growth in Lesotho.ConclusionsThe study concludes that access to finance significantly affects the competitive growth of SMEs in Lesotho. Thus, this study suggests that several specific and harmonized financial policy actions are needed in the Lesotho financial market to establish an enabling policy that will ease enterprises’ access to adequate funding programs. These funding programs should target improved financial schemes that are coordinated, competitive, and directed towards Basotho SMEs’ access to finance, and enables a harmonized credit policy that guarantees a win–win for SME loan applicants and the financial market operators.

Financial literacy and SME loan repayments in South Africa during the COVID-19 era

Small and medium-sized enterprises (SMEs) are the primary victims of the COVID-19 outbreak because they lack adequate resources and are poorly prepared for such interruptions. For SMEs to expand, they need financial assistance such as loans and advances from financial service providers. However, they struggle to repay these loans and advances because they are small in size and do not make large turnovers, and owners lack adequate financial literacy. This study aims to investigate the relationship between financial literacy and loan repayment of SMEs. The study followed a positivist paradigm, and a quantitative approach was employed. A total of 110 self-completed Likert questionnaires were distributed, only 107 were filled correctly and analyzed using SPSS. The results from Pearson’s correlation coefficient showed a strong and significant relationship between financial literacy and SME loan repayments at r = 0.324, P < 0.0005. Regression analysis showed a significant linear relationship between financial literacy and SME loans repayments, F (1.152) = 17.806; P < 0.0005. P < 0.0005 is less than the independent variable (SME loans repayments), B = 0.324, P < 0.0005. The results imply that if SME owners are well-versed in finance, they will be capable of repaying outstanding loans and advances timely.

The Financing of Small and Medium-Sized Enterprises: an analysis of the financing Gap in Brazil

While small and medium-sized enterprises (SMEs) are important for economic growth and employment, they face numerous obstacles in accessing external finance. In this article, we review recent developments in the availability of financing for SMEs in Brazil, focusing on the greater use of equity and debt for SMEs. In assessing the barriers to external financing, we focus on the role of bank characteristics, market structure and variations of interest rate spreads across banks and time. Moreover, as banks retreat from SME financing, we examine the potential for SMEs to seek new sources of financing from private equity and venture capital funds. We examine the changes in the availability of bank loans between 2014 and 2016. By considering demand, we estimate the SME loan gap based on Central Bank and publicly available data. Our results show that the loan gap in Brazil is substantial. Finally, we show that the gap grew from 54.29% in 2014 to 87.5% in 2016.

The Financing of Small and Medium-Sized Enterprises: An Analysis of the Financing Gap in Brazil

While small and medium-sized enterprises (SMEs) are important for economic growth and employment, they face numerous obstacles in accessing external finance. In this article, we review recent developments in the availability of financing for SMEs in Brazil, focusing on the greater use of equity and debt for SMEs. In assessing the barriers to external financing, we focus on the role of bank characteristics, market structure and variations of interest rate spreads across banks and time. Moreover, as banks retreat from SME financing, we examine the potential for SMEs to seek new sources of financing from private equity and venture capital funds. We examine the changes in the availability of bank loans between 2014 and 2016. By considering demand, we estimate the SME loan gap based on Central Bank and publicly available data. Our results show that the loan gap in Brazil is substantial.

The Study on the Effectiveness of SME Supporting Factor on SME Loan

본 연구는 향후 경기둔화 전망에 근거한 중소기업 금융 접근성 제약 가능성을 완화하기 위해 EU에서 도입된 중소기업 지원팩터 제도의 효과성을 검증했다. 즉, 본 논문은 상기 제도가 중소기업대출증가에 기여할 수 있다는 Mayordomo, Rodriguez-Moreno(2018)의 연구결과가 국내에도 적용될 수 있는지를 파악하였다. 본 연구를 통해 확인한 주요결과는 다음과 같다. 첫째, Klomp, De Haan(2012)의 주장대로 국내 은행은 중소기업대출의 위험증가에 대한 기여도가 높을수록 해당 대출을 감소시키는 경향이 있었다. 둘째, 중소기업 지원팩터 제도는 완충자본의 추가확보를 통해 중소기업대출 증가에 기여하는 것이 확인되어, Mayordomo, Rodriguez-Moreno(2018), Aiyar, Calomiris, Wieladek(2016)의 연구결과를 지지했다. 셋째, 중소기업대출 증가에 기여하는 재무적 특성변수는 수익성 요인으로서, 수익성 증가시 위험대출이 증가하는 경향을 보였다. 결론적으로 자본규제 강화로 인한 은행의 위험감수 가능성을 낮출 수 있다는 Albertazzi, Marchetti(2010)의 연구결과보다는 Mayordomo, Rodriguez-Moreno(2018)의 주장이 경기부진이 예상되는 국내 여건에 좀 더 적합하다고 사료된다.This study examines whether SME supporting factor (SF) introduced by EU may relieve the constraint of finance for SMEs (small and medium sized enterprises) on the basis of the forecast of economic slowdown. Thus, this study aims to confirm the assertion of Mayordomo, Rodriguez-Moreno (2018) that SF can contribute to increasing the SME loan is applicable to Korean situation. Main results are as follows. First, Korean banks tend to decrease the SME loan when it can contribute to increasing credit risk like the argument of Klomp, De Haan (2012). Second, it is confirmed that SF can expand SME loan based on additional capital buffer, and this evidence is line with the studies of Mayordomo, Rodriguez-Moreno (2018) and Aiyar, Calomiris, Wieladek (2016). Third, the financial characteristics of bank to contribute to increasing SME loan is profitability, and risky loan tends to increase when profitability is improved. Finally, the assertion of Mayordomo, Rodriguez-Moreno (2018) is more suitable than that of Albertazzi, Marchetti (2010) suggesting banks’ risk taking can be reduced through tight capital regulation when economic recession is forecasted.

Optimal credit guarantee ratio for small and medium-sized enterprises’ financing: Evidence from Asia

Difficulty in accessing finance is one of the critical factors constraining the development of small and medium-sized enterprises (SMEs). Given their importance for national economies, it is imperative to find ways to provide SMEs with stable finance. One efficient way to promote SME financing is through credit guarantee schemes, by which the government guarantees a portion (ratio) of a loan provided by a bank to a SME. Due to asymmetry of information between banks and SMEs, total loans to SMEs are smaller than the desired level of SME loan demand. Therefore, providing credit guarantees reduces information asymmetry between SME and banks, which increases the amount of loans to SMEs. The ultimate goal of the government is to provide a desired level of loans to SMEs by reducing information asymmetry. This research provides a theoretical model and an empirical analysis of factors that determine an optimal credit guarantee ratio. The ratio should be at such a level that it achieves the government’s goal of minimizing banks’ nonperforming loans to SMEs, and at the same realize the government policy objective of supporting SMEs by reducing information asymmetry. Our results show that three factors determine the optimal credit guarantee ratio: (i) government policy, (ii) macroeconomic conditions, and (iii) the behavior of banks. To avoid moral hazard and ensure the stability of lending to SMEs, it is crucial for governments to set the optimal credit guarantee ratio based on macroeconomic conditions and vary it for each bank or each group of banks based on their soundness.

Financing Small and Medium-Sized Enterprises in Thailand: The Importance of Bank Loans and Financing Diversification

Bank loans are the main sources of financing the Small and Medium-Sized Enterprises (SME) sector of the Thai economy. This sector contributes to about 37% GDP and employs about 80% of the labor force. Recent data indicate a decline in bank lending; this necessitates the efficient use of available funds and strategies to diversify SME financing. Using data from 2007 – 2014, we analyze the performance of this sector by applying several measures of productivity. We find average productivity to be greater than one for: (a) SME output per unit of SME and (b) SME output per Baht loan. This satisfactory performance is the result of government stabilization policies to ensure adequate loan support to this sector together with effective risk management strategies. The decline in the ratio of SME nonperforming loans to total SME loans attests to prudent policies to maintain high asset quality during a period of economic fluctuation. Policies to supplement bank financing and to diversify the sources of funding include the widening and deepening of the capital market. Sustainable growth policies should emphasize human capital development to stem declining labor productivity and also increasing expenditures on R&D to promote innovation-led growth..

SMEs, public credit guarantees and mutual guarantee institutions

Purpose The purpose of this paper is to focus on public guarantees granted to micro-, small- and medium-sized enterprises (SMEs) by the Italian national credit guarantee programme (Fondo Centrale di Garanzia – Central Guarantee Fund – (CGF)). The CGF provides a direct guarantee to banks granting loans or a counter-guarantee to mutual guarantee institutions (MGIs) acting as first-level guarantors. Because the behaviour of MGIs could affect the default risk of counter-guaranteed loans, it is vital to investigate their operating and structural characteristics in order to identify an optimal design for public credit guarantee schemes (PCGSs). Design/methodology/approach Using regression models, the paper analyses the determinants of default for 33,229 SME loans guaranteed by an MGI and counter-guaranteed by the Italian CGF. The dependent variable is the ex-post default risk of SMEs’ counter-guaranteed loans in the 2010-2011 period. The explanatory variables are certain characteristics of the MGI. Findings The authors demonstrate that increases in an MGI’s leverage and the size of the counter-guaranteed portfolios increase the default risk. When the counter-guaranteed portfolio increases, MGIs are more risk taking but take less risk than when local and specialized MGIs are at play. Finally, direct public aid is relevant. Practical implications An appropriate design of the PCGS becomes crucial to controlling moral hazard in financial institutions and ensuring the financial sustainability of public intervention in favour of SMEs. Originality/value The paper evaluates an original and confidential firm-level data set that is not available in public documents or supervisory board statistics but is collected directly from the MGIs that participated in this study.

Filling the Gap: How Technology Enables Access to Finance for Small- and Medium-Sized Enterprises

Traditional financial services are rapidly being reformed by technology. Small- and medium-sized enterprises (SMEs) account for more than one-half of the world’s GDP and employ two-thirds of the global workforce, however a key barrier to growth faced by SMEs around the globe is access to financing. This is not a new issue, as the onerous information, administration, and collateral requirements associated with traditional loans have inhibited SMEs from seeking or securing financing. The 2008 financial crisis only exacerbated the problem, as many local retail banks (often the primary providers of SME financing) closed their doors and the appetite for taking on high-risk SME loans was quelled. Online business lending may be stepping in to fill this gap by resolving many of the barriers associated with traditional SME financing. This paper analyzes data from PayPal Inc., a company best known for its global online payment system, and from Kiva, a crowdsourcing platform. PayPal Working Capital launched in late 2013; it is a product that enables SMEs to apply for and obtain short-term credit. Our objective is to understand how technology is impacting SMEs’ ability to access financing. Our findings suggest the following: (i) online business loans have stepped in to fill the SME funding gap left in the wake of the 2008 financial crisis; (ii) young and minority-owned businesses with low and moderate income benefit particularly from online business loans; and (iii) online business loans can boost the growth of SMEs in under-served counties. Based on increased sales of businesses that have received PPWC loans, we estimate that programs like this have the potential to boost economic activity considerably.

Are SME Loans Less Risky than Regulatory Capital Requirements Suggest?

This article addresses firm size as a driver of systematic credit risk in loans to small and medium-sized enterprises (SMEs). Key contributions are the use of a unique dataset of SME lending by more than 400 German banks and relating systematic risk to the size dependence of regulatory capital requirements. What sets this sample apart is its comprehensive coverage of the particularly rich and well-developed credit market for SMEs in Germany. The authors estimate asset correlations as the key measure of systematic risk from historical default rates. The results suggest that systematic risk tends to increase with firm size, conditional on the respective rating category. They also compare the size of this effect with the capital relief that has been granted in Basel II for SMEs relative to large firms. The asset correlation estimates suggest a significantly larger relative difference from the corresponding values for large firms than reflected in the regulatory capital requirements in two cases: first, for SME loans in the corporate portfolio of the internal ratings–based approach, and second, for SME loans treated under the revised standardized approach of Basel II. <b>TOPICS:</b>Fixed income and structured finance, developed

Are SME Loans Less Risky than Regulatory Capital Requirements Suggest?

Our paper addresses firm size as a driver of systematic credit risk in loans to small and medium-sized enterprises (SMEs). Key contributions are the use of a unique data set of SME lending by over 400 German banks and relating systematic risk to the size dependence of regulatory capital requirements. What sets our sample apart is its comprehensive coverage of the particularly rich and well-developed credit market for SMEs in Germany. We estimate asset correlations as the key measure of systematic risk from historical default rates. Our results suggest that systematic risk tends to increase with firm size, conditional on the respective rating category. We also compare the size of this effect with the capital relief that has been granted in Basel II for SMEs relative to large firms. Our asset correlation estimates suggest a significantly larger relative difference from the corresponding values for large firms than reflected in the regulatory capital requirements in two cases: first, for SME loans in the corporate portfolio of the Internal Ratings-Based Approach and, second, for SME loans treated under the revised standardized approach of Basel II.

Better safe than sorry: defensive loan assessment behaviour in a changing bank environment

PurposeThe purpose of this paper is to examine to what extent and in what forms loan applications from small and medium‐sized enterprises (SMEs) in a risk averse banking environment can be assessed defensively by lending officers (LOs). The paper also identifies triggering mechanisms behind defensive SME loan assessment behaviour and its' possible effects on the bank and the LOs.Design/methodology/approachThe paper relies on a case study of a major Swedish commercial bank undergoing strategy and control system change during the recent financial crisis. The empirical evidence was collected through interviews with 76 LOs in three branch offices and a focus group interview session.FindingsIn a risk averse banking environment, LOs can be prone to assessing SME loan applications defensively to a noteworthy extent. Such defensiveness comes in different forms: denial of loan applications, granting of loans with collateral or high interest rates, or granting of loans only to clients with most of their financial affairs in the bank. External and internal mechanisms jointly trigger defensive loan assessment behaviour. The possible effects include fewer Type II errors and more Type I errors for the bank, while LOs avoid change and blame.Originality/valueOverall, this study contributes to the literature by revealing triggering mechanisms, forms and effects related to the multifaceted construct of defensive loan assessment behaviour among LOs in a commercial bank, who handle applications from SMEs.

Bargaining power and information in SME lending

Small- and medium-sized enterprises (SMEs) are informationally opaque and bank dependent. In SME lending, banks largely rely on soft information, because the scale and scope of hard information are limited. We analyze whether and how hard and soft information affects the borrower’s bargaining power vis-a-vis its bank. We use the fact that, for a given credit rating, certain borrowers obtain better loan terms than others to define measures of relative bargaining power. Using SME loan data from the USA and Germany, we find that more favorable soft information (management skills and character) increases borrower bargaining power. We also show that more favorable soft than hard information improves borrower bargaining power. The results are not driven by manipulation or statistical limitations of the credit ratings. Our study suggests that soft information represents an important and direct determinant of borrower bargaining power, affecting the outcomes of the loan contracting process.

Bargaining Power and Information in SME Lending

Small- and medium-sized enterprises (SMEs) are informationally opaque and bank-dependent. In SME lending, banks largely rely on soft information because the scale and scope of hard information is limited. We analyze whether and how hard and soft information affects the borrower’s bargaining power vis-a-vis its bank. We use the fact that, for a given credit rating, certain borrowers obtain better loan terms than others to define measures of relative bargaining power. Using SME loan data from the United States and Germany, we find that more favorable soft information (management skills and character) increases borrower bargaining power. We also show that more favorable soft than hard information improves borrower bargaining power. The results are not driven by manipulation or statistical limitations of the credit ratings. Our study suggests that soft information represents an important and direct determinant of borrower bargaining power, affecting the outcomes of the loan contracting process.

Credit Risk Assessment and Relationship Lending: An Empirical Analysis of German Small and Medium‐Sized Enterprises*

We estimate a logit scoring model for the prediction of the probability of default by German small and medium‐sized enterprises (SMEs) using a unique data set on SME loans in Germany. Our scoring model helps SMEs to gain knowledge about their default risk, which can be used to approximate their risk adequate cost of debt. This knowledge is likely to lead to a detection of hold‐up problems that German SMEs might be confronted with in their bank relationships. Furthermore, it allows them to monitor their bank’s pricing behavior and it reduces information asymmetries between lenders and borrowers. Finally, it can influence their future financing decisions toward capital market‐based financing.

Incrementality of SME Loan Guarantees

In many countries, loan guarantee programs are important elements of government policy with respect to small- and medium-sized enterprises (SMEs). If loan guarantee schemes are to be effective, a majority of firms obtaining assistance through such a scheme ought not to be able to obtain financing from existing sources: a property known as incrementality or additionality. This paper describes a new approach to measuring incrementality. This work uses a two-stage process to estimate the incrementality of loans made under the terms of the Canada Small Business Financing (CSBF) program. First, a logistic regression-based model of loan outcomes (essentially a credit-scoring model) is estimated based on a large representative sample of SMEs. The resulting model was consistent with prior expectations and exhibited high levels of goodness-of-fit. The model was then employed to classify a sample of firms that had received loans under the terms of the loan guarantee scheme. Incremental loans ought to be classified as “turndowns” by the model; hence the proportion of loan guarantee recipients that the model classified as turndowns is a direct measure of incrementality. For the CSBF loan guarantee program incrementality was estimated (with 95% confidence) as 74.8±9.0%.