Expectations of access to debt finance for SMEs in times of uncertainty

ABSTRACT

This articles examines small and medium enterprises’ (SMEs) expectations of access to debt finance in times of uncertainty. In particular, we studied whether relationship lending affects British SMEs’ concerns about future access to debt finance after the UK referendum on European Union membership (the so-called Brexit referendum). By using a unique survey, we found that relationship lending significantly reduces SMEs’ expectations of being financially constrained, although the same does not hold for firms engaging in product innovation. Our results are robust after controlling for accounting information disclosure and for the relationship between the expectation of access to debt finance, the prospect of growth, and changes in business strategies.

KEYWORDS:

• Access to debt finance
• small and medium enterprises (SMEs)
• Brexit referendum
• uncertainty

Acknowledgments

We would like to thank two anonymous referees and Stefano Bonini, associate editor, for valuable comments and suggestions. We also thank Bronwyn McDonald, economist at the British Business Bank, for providing the data. We are solely responsible for all existing errors and omissions. All the authors contributed equally to this work.

Notes

¹ For example, only 36 percent of English small businesses used external finance in 2017 compared to 44 percent in 2012 and over 7 in 10 firms claimed they would rather forgo growth than apply for external finance. Source: British Business Bank. Retrieved from https://www.british-business-bank.co.uk/research/small-business-finance-markets-report-2019.

² Bank loans cover 67 percent of gross new funding for UK SMEs in 2007 Source: https://www.ukfinance.org.uk/system/files/UK-Finance-SME-Finance-in-UK-AW-web.pdf.

³ Department for Business, Energy & Industrial Strategy, Business Population Estimates, 2019. Retrieved from https://www.gov.uk/government/statistics/business-population-estimates-2019.

⁴ The International Finance Corporation (IFC) and the World Bank estimate that 40 percent of formal micro, small, and medium enterprises in developing countries have an unmet financing need. Instead, the total global finance gap is associated with 46 percent and 15 percent of SMEs in, respectively, East Asia and Pacifica and Europe and Central Asia. Source: https://www.worldbank.org/en/topic/smefinance.

⁵ The Credit Conditions Surveys provided by the Bank of England (various years) show that use of external finance by SMEs has fallen steadily since the period before the global recession.

⁶ For example, almost 33 percent of English SMEs contact their main bank directly when they need finance. In addition, for almost 41 percent of English SMEs, having an existing relationship continues to be the most common reason for choosing financial providers. Source: British Business Bank. 2018 Business Finance Survey: SMEs. Retrieved from https://www.british-business-bank.co.uk/research/small-business-finance-markets-report-2019.

⁷ Particularly, debt finance includes: bank finance (bank overdraft, bank loan, bank mortgage) and nonbank finance (government or local government grants, loans from friends and family, loans from directors, loans from other parties, leasing or hire purchases, invoice finance or factoring, credit cards, finance from government scheme, international trade office, equity finance, mezzanine finance, peer-to-peer lending, corporate bonds).

⁸ The survey reports 11 possible external financial options: business angels, equity crowdfunding platforms, trade finance, government or local government grants, invoice finance or factoring (asset-based finance), leasing or hire purchasing, mezzanine finance, peer-to-peer lending platforms, venture capitalists, corporate bonds.

⁹ This is also confirmed by the variance inflation factor (VIF) that is not higher than 4.

¹⁰ The question related to expected access to debt finance in general was answered by 1,046 SMEs.

¹¹ For this analysis, we considered all the SMEs in the sample. All the SMEs in our sample that expect to be negatively affected by the Brexit referendum also expect to be financially constrained.

¹² Under relationship-lending technologies, financial providers rely primarily on the collection of qualitative information via personal interaction/acquaintance, the so-called soft information (Rajan, 1992). Instead, transaction/asset-based lending technologies mainly rely on hard quantitative information such as information derived from the borrowers’ balance sheets and/or the collateral guarantees/assets offered as the primary source of repayment (Berger & Udell, 2006).

¹³ We considered the following answers: “decrease number of hours of existing staff”; “make staff redundant”; “use staff on different contracts (e.g., casual or zero-hours contract workers or self-employed workers”; “make other changes to staff employed.”

¹⁴ See https://www.ft.com/content/69aa275e-2bbe-11e9-88a4-c32129756dd8.