Access to finance in the euro area: what are SMEs telling us about the crisis?

Annalisa FerrandoEuropean Central Bank

The economics of small businesses in the aftermath of the crisis. Cross-country

analyses and policiesUrbino, 21 October 2010

The views expressed are those of the author and should not be attributed

to the European Central Bank

2

Outline

1. Presentation of the survey: main characteristics, sample and design, questionnaire, dissemination of results

2. Main findings of the survey• Availability and needs of external

finance

3. Some preliminary results on the determinants of financing obstacles

4. Conclusions

3

1. Main characteristics of the survey• Joint survey ECB - European Commission (DG ENTR) on

the “Access to finance of European SMEs”

• Frequency– Every 6 months: ECB part on latest developments in

financing conditions– Every 2 years: full survey (incl. more forward-looking

and structural questions)

• Three rounds have been run so far :– Summer 2009: results refer broadly to first half of

2009– Winter 2009: results broadly refers to the 2nd half of

2009– Summer 2010: between 30 August and 21 September

– results broadly refer to first half of 2010 (to be published 22 October)

4

1. Sample size and design

• Sample: more than 8,500 firms of different sizes in the EU, of which 5,000 firms in the euro area

• 10% large firms; the rest equally divided among micro (<10), small (10-49) and medium (50-249)

• Representative:

– for each of the largest countries (Germany, France, Italy and Spain);

– for industry, construction, trade and services

– by firm size categories (4)

5

1. Questionnaire

• “Structural” information: firms’ size, age, type of ownership, sector, nationality, etc.

• Information on the financing needs, use of financing, and availability of finance

• Questions are often: “Over the past six months, has [X] improved, deteriorated, or remained unchanged?”– with [X] economic or financial indicators,

access to or needs for financing sources, or other topics

6

1. Dissemination of survey results

• Report on euro area results published by the ECB on its website (+ report published by the EC)

• Complete aggregate tables for all variables and various breakdowns (e.g. size, sector, countries) available on the website www.ecb.int

• Third wave will be published 22 October

http://www.ecb.europa.eu/stats/money/surveys/sme/html/index.en.html

7

2. SMEs’ most pressing problems in 2009H2 were…

Source: ECB, (percentage of respondents)

0%

10%

20%

30%

40%

Finding

customers

Competition Access to

finance

Costs of

production or

labour

Availability of

skilled staff or

experienced

managers

Regulation Other Don't know /

No answer

DE ES FR IT Other euro area countries

8

2. External financing needs tended to increase in 2009

19 2510 12

4950

43 44

99

67

2015

38 35

4

0

10

20

30

40

50

60

70

80

90

100

2009 H1 2009 H2 2009 H1 2009 H2

Bank loans Trade credit

Increased Unchanged

Decreased Not applicable

Don't know

External financing needs of euro area SMEs (change over the preceding six months, percentage of respondents)

Base: All SMEs.

20 207 8

46 49

49 41

1515

811

15 14

34 38

4

0

10

20

30

40

50

60

70

80

90

100

2009 H1 2009 H2 2009 H1 2009 H2

Bank loans Trade credit

Increased Unchanged

Decreased Not applicable

Don't know

SMEs Large firms

9

2. At the same time, the availability of external financing remained critical for SMEs

Availability of external financing to euro area SMEs (change over the preceding six months, percentage of respondents)

10 10 4 6

40 43

3038

43 42

23

23

5

3829

5 4

0

10

20

30

40

50

60

70

80

90

100

2009 H1 2009 H2 2009 H1 2009 H2

Bank loans Trade credit

Improved Unchanged

Deteriorated Not appl icable

Don't know

Base: SMEs that applied for external financing.

7 10 5 6

3949

3037

4838

2119

6

4337

0

10

20

30

40

50

60

70

80

90

100

2009 H1 2009 H2 2009 H1 2009 H2

Bank loans Trade credit

Improved Unchanged

Deteriorated Not applicable

Don't know

Base: Large firms that applied for external financing.

SMEs Large firms

10

2. At country level there is some heterogeneity…

Other EA

DE

DEES

ES

FR

FR

IT

IT

Other EA

euro area

euro area

-10

-5

0

5

10

15

20

25

30

-60 -50 -40 -30 -20 -10 0 10Expanding

supply /

contracting

demand

Contracting supply / growing demand

for loans => increasing financing gap

Contraction of both supply

and demand for loans

Expansion

of both

supply and

demand for

loansNeeds

for

bank

loans

Availability of bank loans

Source: ECB.Notes: Pink squares: 2009H1; green circles: 2009H2.

11

...which is broadly in line with the evidence from MFI loans

-5

0

5

10

15

Sep 2008 Mar 2009 Sep 2009 Mar 2010

euro area DE ES FR IT

First and second round of the survey

Source: ECB, MFI Balance sheet items.Note: annual rate of growth.

12

... and is partly reflected in the reports by banks on credit standards

Source: BLS ECB. Notes: net percentages of banks contributing to tightening credit standards.

-25

0

25

50

75

100

Dec2007 Apr2008 Aug2008 Dec2008 Apr2009 Aug2009 Dec2009 Apr2010

U2 DE ES FR IT

First and second round of the

survey

13

2. Main reasons for the deterioration of the availability of external financing for euro area SMEs…Factors having an impact on the availability

of external financing to euro area SMEs (change over the preceding six months, percentage of respondents)

9 12 15 16 14 1811 15

7 8

2636

3948

5959

6564

3742

6347

4230

24 21 16 14

3233

1811

6 4 6 8 6 5 5

0

10

20

30

40

50

60

70

80

90

100

2009H1

2009H2

2009H1

2009H2

2009H1

2009H2

2009H1

2009H2

2009H1

2009H2

Generaleconomic

outlook

Firm-specificoutlook

Firm’s owncapital

Firm’s credithistory

Will ingness ofbanks to

provide a loan

Improved Unchanged Deteriorated Not applicable/ did not want to use Don't know

Base: All SMEs.

1) Mostly, the general economic and firm-specific outlook

2) But some deterioration in banks’ willingness of to provide a loan is noticeable throughout the year 2009

14

2. .. and at country level for 2009H2

Factors having an impact on the availability of external financing to euro area SMEs (change over the preceding six months, percentage of respondents)

Base: All SMEs.

15 7 9 15 1121

10 15 18 13 12 7 7 8 7

36

25

49 3932

49

38

56 4948

3725

6043 48

4465

40 4146

2550

2725

2833 59

2035 22

- - - --

- - -- - 14 5 10

3 19

5 3 2 5 11 5 2 3 9 12 4 4 3 11 5

0

20

40

60

80

100

DE ES FR IT OtherEA

DE ES FR IT OtherEA

DE ES FR IT OtherEA

General economic outlook Firm-specific outlook Willingness of banks to provide aloan

Improved Remained unchanged Deteriorated Not applicable to my firm Don't know

15

2. Terms and conditions of bank financing remained tight for SMEs in 2009Outcome of application for external financing(% change compared with previous six months; % of respondents

Terms and conditions of bank loans granted to euro area SMEs(change over the preceding six months, % of firms that applied for bank loans)

34 35 40 42

16 15

34 39 34 36

31 34

44 45

55 57

5553

54 54

29 277 7

22 22

5 5 9 6 7 5 8 6 10 8

0

10

20

30

40

50

60

70

80

90

100

2009H1

2009H2

2009H1

2009H2

2009H1

2009H2

2009H1

2009H2

2009H1

2009H2

Level ofinterest

rates

Level of theother costs

of financing

Availablesize of loan

or credit l ine

Collateralrequirements

Otherrequirements

Increased by the bank Unchanged

Decreased by the bank Don't know

16

2. Terms and conditions of bank financing varied a lot across countries in 2009H2

Source: ECBNote: change over the preceding six months, net percentages based on firms that applied for bank loans. Negative sign: impact of the item decreased on net.

-4

39

-10-10

16 22

59

2734

26

-2 -18

4

-13

1 1

-2

4

-2 -1

61

25 2633 39

56

13 203637

-30

-15

0

15

30

45

60

75D

E ES

FR IT

Oth

er DE ES

FR IT

Oth

er DE ES

FR IT

Oth

er DE ES

FR IT

Oth

er DE ES

FR IT

Oth

er DE ES

FR IT

Oth

er

Level of interestrates

Level of the costof financingother than

interest rates

Available size ofloan or credit line

Availablematurity of the

loan

Collateralrequirements

Other

17

2. Lending rates to NFCs remain historically low

Source: ECB.

Note: Small loans (loans up to EUR 1 million) (proxy for loans to SMEs).

2

3

4

5

6

7

Jan.03 Jan.04 Jan.05 Jan.06 Jan.07 Jan.08 Jan.09 Jan.10

euro area DE ES FR IT

18

2. Outlook for 2010: large firms somewhat more optimistic than SMEs

Expectations regarding access to finance (change over the following six months, percentage of respondents)

SMEs Large firms

16 2112 14

6 8

58 5257 53

48 49

18 2116 20

911

9 8

31 28

6 4 6 5 6 5

0

10

20

30

40

50

60

70

80

90

100

2009 H1 2009 H2 2009 H1 2009 H2 2009 H1 2009 H2

Internal funds Bank loans Trade credit

Expected to improve Expected to remain unchanged

Expected to deteriorate Not applicable

Don't know

23 2813 18

8 7

52 47

61 53

55 51

20 2013 18

68

8 8

28 31

4 5 4

0

10

20

30

40

50

60

70

80

90

100

2009 H1 2009 H2 2009 H1 2009 H2 2009 H1 2009 H2

Internal funds Bank loans Trade credit

Expected to improve Expected to remain unchanged

Expected to deteriorate Not appl icable

Don't know

Base: All SMEs.

19

2. Some indications for 2010H1

• Survey results confirm the timid revival of economic activity with clear signs of improvements for large firms but less favourable situation for SMEs (turnover, profitability).

• SMEs indicated a slightly more intense use of external sources of finance (overdrafts, credit lines and bank loans).

• A less severe deterioration in the availability of external financing and a mild increase in financing needs for SMEs → in aggregated terms the gap between needs and availability of bank loans has decreased.

• High heterogeneity across countries (DE versus ES).

20

3. Determinants of financing obstacles for euro area NFCs

Are they different during a financial crisis?

The SAFE survey gives us the opportunity to test what firm characteristics are valid predictors of financing obstacles across countries in a period of financial crisis.

21

3 Previous results• Measures of financing obstacles using the survey

results of the WBES (World Bank)

– Beck et al. (2006, 2008) find that age, size (not for developed countries) , sector and ownership structure predict financing obstacles.

– For five major EA countries, Coluzzi et al. (2009) find age, size (but not always), sectors and economic performance explain probability of financing obstacles.

– For Italian firms, Angelini and Generale (2008) find a negative link between financial constraints and firm size but this seems to be a real problem only for a small portion of their sample. More important is the link between financial constraints and firm age.

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3. Some preliminary results based on 2nd SAFE wave

• Age and ownership remain important explanatory variables

• Mixed results are achieved for size and economic branches.

– One explanation would be : the recent financial crisis has been widespread across various sectors and size, outweighing existing structural differences in the access to finance, once controlling for other characteristics.

• These preliminary results are confirmed– probit regressions at country level/sector level– when we introduce other explanatory variables, such as

bank loan applications,– when we consider the interaction between financing

obstacles and use of external sources of finance.

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3. A simple model

• Probit model

• FinObst is the response by firm i in country k and indicates access to finance as most pressing problem.

• Firm characteristics: vector of major firm attributes (e.g. size dummies, sectoral dummies, dummies for turnover and ownership, firm age).

• Country is a vector of country dummies

• Only observations with non-missing values on the relevant variables are considered, allowing the number of observations to be kept constant across estimations of the same type .

24

3. Experiencing financing obstacles – The role of firm characteristics

•Country dummies included, all significant:

wrt DE:

Negative coeff:Austria, Finland (-0.5) Belgium, France (-0.3) Portugal (-0.2) Netherlands (-0.1)

Positive coeff:Italy (0.1)Ireland (0.2)Greece (0.4) Spain (0.5)

• Cluster robust standard errors in parentheses.

• Significance levels: *** p<0.01, ** p<0.05, * p<0.1

Dep var: Financing obstacles (1) (2) (3) SMEs

Firm sizea Micro 0.149* 0.0973 0.0335 (0.0784) (0.0881) (0.107) Small 0.131* 0.0858 0.0329 -0.00143 (0.0762) (0.0827) (0.0696) (0.132) Medium 0.115** 0.0966* 0.0732 0.0396 (0.0476) (0.0500) (0.0491) (0.0999) Log of firm age -0.128*** -0.132*** -0.131*** -0.128*** (0.0279) (0.0293) (0.0304) (0.0323) Sectorb Industry -0.0510 -0.0376 -0.0374 0.00894 (0.136) (0.130) (0.126) (0.140) Service -0.110 -0.104 -0.101 -0.0593 (0.128) (0.123) (0.123) (0.134) Trade -0.0578 -0.0498 -0.0577 -0.0161 (0.125) (0.120) (0.120) (0.125) Autonomous 0.216* 0.170 0.162 profit orientedc (0.110) (0.108) (0.113) Firm Ownershipd Family or entrepreneurs 0.267*** 0.289*** (0.0679) (0.0941) Other firms 0.152** 0.167* (0.0683) (0.0978) Venture capital firms or 0.572*** 0.618*** business angels (0.209) (0.219) Natural person 0.284*** 0.304*** (0.0692) (0.0715) Other -0.0720 -0.255 (0.148) (0.288)

Observations 4,742 4,742 4,742 4,282

Pseudo R2 0.0645 0.0667 0.0712 0.0692

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3. A bivariate probit model

• Investigate the existence of underlying factors that (simultaneously) determine both the experience of financing obstacles and firms’ financing patterns (internal vs. external).

• Under the hypothesis

26

External finance and financing obstacles – a bivariate probit model

• country dummies included but not reported

• Cluster robust standard errors in parentheses.

• Significance levels: *** p<0.01, ** p<0.05, * p<0.1

(1) (2) VARIABLES external Access to finance

Firm size a Micro -0.696*** 0.0342

(0.0780) (0.105) Small -0.245*** 0.0410

(0.0697) (0.0701) Medium -0.184** 0.0787

(0.0847) (0.0491) Log of firm age -0.0605*** -0.130***

(0.0233) (0.0317) Autonomous 0.121 0.168

pofit orientedb (0.0787) (0.114) Sectorc Industry -0.0352 -0.0329

(0.0789) (0.128) Service -0.0444 -0.0935

(0.0821) (0.124) Trade -0.00608 -0.0537

(0.115) (0.119) Firm Ownershipd

Family or entrepreneurs -0.0112 0.270*** (0.0818) (0.0703)

Other firms -0.0840 0.155** (0.0733) (0.0707)

Venture capital firms or 0.00623 0.559*** business angels (0.151) (0.209)

Natural person 0.0911 0.297*** (0.104) (0.0685)

Other -0.271** -0.0610 (0.134) (0.146)

rho 0.270*** (0.0272)

Constant 1.109*** -0.993*** (0.186) (0.0912)

Observations 4,710 4,710

27

Conclusions

• Access to finance was 2nd biggest problem for euro area firms in 2009.

• During 2009, external financing needs have increased but availability has deteriorated.

• General and firm-specific economic outlook largely blamed for this financing gap.

• But willingness of banks to provide loans is also highlighted.

• Outlook for 2010: clear signs of improvements for large firms but still less favourable situation for SMEs.

• In a period of crisis, most significant determinants of financing obstacles seem to be country and age (rather than economic activity or size).

• Ownership matters as well.

Thank you for your attention