how have sme finances been affected by the credit crisis?* berr/esrc seminar: sme access to finance...
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3Warwick Business School UKSMEF 2008 Fieldwork 10 th Sept – 20 th Nov ,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.TRANSCRIPT
How have SME finances been affected by the credit crisis?*
BERR/ESRC Seminar: SME Access to Finance
Dr. Stuart FraserCentre for Small and Medium Sized
EnterprisesWarwick Business School
*This research was funded by ESRC grant no. RES-177-25-0007 and with support from Barclays Bank.
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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?
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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.
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HypothesesH1: 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.
Loan approval thresholds
H2 →
Probability of Default
Pre-2008 2008
← H1
Default Risk Distribution
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% of Businesses Experiencing Serious Problems
5.6%
8.1%8.8%
6.4%
18.1%
6.2%
10.5%
5.5%
11.5%
9.4%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Production Getting orders Staffing/Personnel Finance Red tape
Percentage with serious problems (score>7/10)
20042008
Credit crisis and recession affecting business problems…
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and SMEs are more likely to default in 2008…
Dun & Bradstreet Risk Ratings
5.7%
31.9%
4.4%3.5%
11.5%
63.3%
21.7%
58.0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Minimal risk Low risk Average risk High risk
20042008
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Summary analysis of changes between 2004 and 2008 in…
Use of financial productsCapital demandsLoan rejection ratesDiscouragement rates
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Use of Financial Products
55.3%
52.9%
26.9%
24.3%
6.4%
3.0% 2.9%
37.3%
3.2%2.2%
5.7%
16.4%
20.5%
42.5%
54.4%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
Credit Cards Overdrafts Asset Finance Term Loans Grants Invoice Finance Equity Trade Credit
20042008
Lower use of financial products in 2008…
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This reflects a fall in demand…% of Businesses with Capital Demands
59.1%
31.4%
3.3% 3.3%
50.2%
22.6% 23.5%
3.0% 3.9%
28.1%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Overdrafts Term Loans Leasing and HirePurchase
Invoice Finance Equity Finance
20042008
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and a rise in rejection rates…Rejection Rates (Overdrafts)
7.2%
35.9%
16.3%
1.1%4.9%
1.6%4.2%
19.0%
10.9% 12.1%
20.4%
4.7%
17.1%
3.1%
8.9%
4.7%
15.3%
93.6%
9.9%
24.7%
10.0%
1.5%
14.3%
2.6%3.4%
6.1%
18.3%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
All less than10,000
10,000-49,999
50,000-99,999
100,000-249,999
250,000-499,999
500,000-999,999
1,000,000-4,999,999
more than5,000,000
Turnover
20042008Applied in 2008
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Rejection Rates (Term Loans)
7.4%
21.6%
10.1%
2.2%
9.2%
1.9% 2.1%0.5%
1.2%
9.4%
1.7%
13.1%11.2%
7.5%
11.6%
22.9%
1.5%
16.3%
13.5%
45.2%
16.6%
8.8%
26.8%
7.1%5.8%
1.0%1.5%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
50.0%
All less than10,000
10,000-49,999
50,000-99,999
100,000-249,999
250,000-499,999
500,000-999,999
1,000,000-4,999,999
more than5,000,000
Turnover
20042008Applied in 2008
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Reasons for Rejection (Overdrafts)
17.6%
4.7%
11.5%
8.2%7.5%
0.3%
2.4%
5.4%
9.5%10.6%
12.1%
2.3%
4.6%
26.0%
4.1%
25.2%
1.8%
7.8%
5.3%
17.5%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
No Security InsufficientSecurity
PoorPersonal
CreditHistory
PoorBusiness
CreditHistory
No CreditHistory
Applied fortoo much
InadequateBusiness
Plan
Industry tooRisky
Lack ofProfitability
No Reason
20042008
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Reasons for Rejection (Term Loans)
4.0%
1.5% 1.5%2.5%
3.7%
5.2%
2.3%
4.1%
12.8%
4.0%
26.4%
2.1%
0.3%
15.7%
22.7%
14.0%14.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
No Security InsufficientSecurity
PoorPersonal
CreditHistory
PoorBusiness
CreditHistory
No CreditHistory
Applied fortoo much
InadequateBusiness
Plan
Industry tooRisky
Lack ofProfitability
No Reason
20042008
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Also, a significant increase in discouragement…
% Feeling Discouraged from Applying for Loans
3.9% 2.8% 3.7%
0.2% 1.2%
6.3%
19.0%
6.0%7.9% 8.9%
0.3%
9.8%
77.4%
14.7%13.4%
1.5% 1.0%1.4% 1.5%7.3%
5.4% 3.2%2.1%
0.2% 0.3%
6.4%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
All less than10,000
10,000-49,999
50,000-99,999
100,000-249,999
250,000-499,999
500,000-999,999
1,000,000-4,999,999
more than5,000,000
Turnover
20042008Loan Demands in 2008
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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.
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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 ratingAssets of £500K or aboveLow credit demands (sales of £100K or less)High business experience (15 or more years)
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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%)
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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.
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Serious consequences of loan rejection in 2008…
% Reporting Consequences of Rejection
58.5%
3.2%
28.7%
4.6% 4.1%
26.9%
11.5%
7.2%
47.1%
10.7%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
Not much - got fundingfrom elsewhere
Had to use internalfinance
Plans deferred buteventually went ahead
Plans dropped Business got into seriousdifficulties
20042008
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Rejection Rates (Overdrafts) by Region
11.1%
5.9%
12.9%
8.6%7.4%
1.5%0.4%
3.4%
5.6%
1.7%
18.6%
10.7%
4.1%
9.8% 9.6%
5.8%
9.8%
1.4%
36.1%
9.9%
0.7%
18.8%
11.2%
15.3% 14.8%
10.7%
18.4%
23.9%
16.9%
4.5% 4.0%
10.4%
6.0% 5.7%
19.5%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
London SouthEast
SouthWest
WestMidlands
EastMidlands
East NorthWest
Yorkshire NorthEast
Scotland Wales NorthernIreland
20042008Applied in 2008