Access to finance for SMEs in the euro area

Access to Finance Survey

The ECB’s Survey on the Access to Finance of Small and Medium-sized Enterprises in the Euro Area(Access to Finance Survey) report provides evidence on the financial situation, financing needs and access to external financing of small and medium-sized enterprises (SMEs) in the euro area, compared with large firms. The survey also provides an overview of developments in access to finance across euro area countries, as well as information on euro area SMEs’ growth expectations and the obstacles they consider to be hindering their growth. The survey is conducted every six months, with the latest report (published November 2012) covering the period the preceding six months, from April to September 2012. The previous survey report (published April 2012) covered the period from October 2011 to March 2012, and the one before that (published December 2011) reported on changes during April to September 2011.The SMEs are randomly selected from a database of firms and are stratified by firm size class, economic activity and country. The results have been weighted to account for company size and economic activity. The survey was developed together with the European Commission. For the corresponding survey covering all the European Union countries conducted every two years, please see the previous section – SAFE survey.For the November 2012 Survey, a sample of 7,514 firms in the euro area was surveyed of which 6,959 (93%) had less than 250 employees. The April 2012 Survey, had a total sample size of 7,511 firms in the euro area, of which 6,969 (93%) had less than 250 employees. For the December 2011 Survey, the total euro area sample size was 8,316 firms, of which 7,690 had less than 250 employees. In each surveyed enterprise, a top-level executive (general manager, financial director or chief accountant) was interviewed.

Bank Lending Survey

In addition to the Access to Finance Survey, the ECB conducts a similar survey aimed at the banking sector in the euro area - the Euro Area Bank Lending Survey. The main purpose of this survey is to enhance the understanding of bank lending behaviour in the euro area and to help the ECB to assess monetary and economic developments as an input into monetary policy decisions. The survey addresses issues such as credit standards for approving loans as well as credit terms and conditions applied to enterprises and households. It also provides an assessment of the conditions affecting credit demand.

The survey is addressed to senior loan officers of a representative sample of euro area banks and is conducted quarterly. The survey questions relate to changes over the past three months and expectations of changes over the next three months. The results reported in the October 2012 Bank Lending Survey (BLS) relate to changes during the third quarter of 2012 and expectation of the fourth quarter of 2012. The sample size was 131 banks in the euro area (100% response rate). The July 2012 BLS covers changes during the second quarter of 2012 and expectation of changes during the third quarter of 2012. The sample size was 130 banks in the euro area (99% response rate). The April 2012 BLS covers changes during the first quarter of 2012 and expectation of changes in the second quarter of 2012. The sample size was 131 banks in the euro area (100% response rate). And the January 2012 BLS relates to the changes during the last quarter of 2011 and expectations of changes in the first quarter of 2012. The sample size was 124 banks (100% response rate.

The previous January 2012 bank lending survey relates to the changes during the last quarter of 2011 and expectations of changes in the first quarter of 2012. The survey was conducted between 19 December 2011 and 9 January 2012 on a sample of 124 euro area banks. The response rate was 100%.

The questions for the surveys distinguish between three types of loan: loans or credit lines to enterprises; loans to households for house purchase; and consumer credit and other lending to households. For all of these different types of loans the questions asked relate to the following: credit standards for approving loans; credit terms and conditions; and credit demand and the factors affecting it.

The responses to questions related to credit standards focus on the difference (“net percentage”) between the share of banks reporting that credit standards have been tightened and the share of banks reporting that they have been eased. A positive net percentage indicates that a larger proportion of banks have tightened credit standards ('net tightening').

Headline findings from the Access to Finance Survey (November 2012)

A summary of the headline findings relating to euro area SMEs as reported in the November 2012 Access to Finance Survey are as follows:

 

• Against the background of weakening economic activity in the euro area during April to September 2012, a net 10% of SMEs reported a contraction in turnover which represented a further deterioration compared to the previous six-months;
• The importance of “Access to finance” was broadly unchanged as a concern for most SMEs (18%, compared with 17% in H2 2011), close to the peak reached in H2 2009 (19%);
• Younger firms (SMEs up to 5 years old) mentioned “Access to finance” as their most pressing problem (alongside “Finding customers”);
• When compared to the previous survey round, SMEs’ sources of external financing did not change much in the six months between April and September 2012;
• The percentage of euro area SMEs using bank loans (33% of euro area SMEs, down from 35% in H2 2011) and bank overdrafts or credit lines (41%, down from 42%) declined slightly when compared to the previous round, with bank financing remaining the most important source of external financing;
• More SMEs reported an increase (18%, compared with 19% in H2 2011) in their need (i.e. demand) for bank loans than a decrease (12% compared with 11%);
• SMEs reported a lower net percentage change in external financing needs compared with the previous survey (5%, compared with 8%);
• SMEs perceived a further deterioration in the supply of banks loans between April to September 2012 (-22% in net terms, compared with -20% in H2 2011), but not as bad as the levels of 2009 following the bankruptcy of Lehman Brothers
• SMEs also report a further deterioration in the availability of bank overdrafts and trade credit;
• Reasons for the deterioration in external financing include demand-driven factors: general economic outlook and firm-specific outlook. These may reflect higher risks relating to the weakening economic activity, which banks account for in their lending policy;
• During April and September 2012, 24% of SMEs applied for a bank loan, while 46% did not apply due to sufficient internal funds;
• Bank loan rejections have increased slightly to 15%, up from 13% in H2 2011. This represents the highest percentage since the peak of 18% in H2 2009. This more pronounced for micro firms (1-9 employees) which report a much higher rejection rate (24%, up from 20% in H2 2011). At the same time, 60% SMEs reported receiving the full loan amount applied for;
• Expectations regarding access to finance for the period October 2012 to March 2013, SMEs reported a further deterioration in their accessibility to bank loans and overdrafts (-15% and -13%, respectively, from an expected -7% and -8% for H1 2012) - SMEs also expect their internal funds to deteriorate.

 

Headline findings from the Bank Lending Survey (October 2012)

A summary of the headline findings reported in the October 2012 BLS are as follows:

• The net tightening of credit standards by euro area banks for loans to enterprises increased in the third quarter of 2012 (15% in net terms, up from 10% in the second quarter of 2012);
• The net tightening of credit standards on loans to SMEs increased (6% in the second quarter of 2012 to 11% in third quarter of 2012) but that of credit standards to large firms remain broadly stable (17%, compared with 17% in the second quarter of 2012);
• The net tightening of credit standards increased for short-term loans (to 11%, from 8% in the second quarter of 2012) and for log-term loans (to 14%, from 11%);
• Risk perceptions contributed to the increase in the net tightening of credit standards on loans to enterprises in the third quarter of 2012;
• Euro area banks continued to report a pronounced net decline in the demand for loans to enterprises in the third quarter of 2012, and this balance was somewhat more negative than in the previous survey round (-27%, after -25% in the second quarter of 2012);
• Mergers and acquisitions and inventories and working capital were reported to be the main drivers of the more pronounced net decline in demand for loans to enterprises;
• In contrast to the deterioration seen in the second quarter of 2012, banks reported an improvement in their access to retail and wholesale funding across all funding categories (in particular net easing in banks’ access to retail funding, money markets and debt securities) – banks expect funding conditions to keep improving during the fourth quarter of 2012;
• The negative impact of the sovereign debt crisis on banks’ funding conditions diminished substantially during the third quarter of 2012 as evident from the results below:
  • on the impact of the sovereign debt crisis, banks indicated in the third quarter of 2012 a considerable moderation in the impact of sovereign debt tensions on banks’ funding conditions – only 7% of the euro area banks attributed deterioration of funding conditions to the sovereign debt crisis through their direct exposure to sovereign debt, down from 18% in the second quarter of 2012,
  • on balance 10% of the euro area banks reported that the decline in the value of sovereign collateral led to a deterioration in their funding conditions in the third quarter of 2012, after a strong tightening impact on funding conditions in the second quarter of 2012 (24%),
  • “other effects”, which may include financial contagion effects, also exhibited a moderation in the impact of sovereign tensions on banks’ funding conditions (on balance 15%, down from 24% in the second quarter of 2012);
• Compared to the second quarter of 2012, the impact of the sovereign debt crisis on banks’ credit standards also diminished somewhat at the euro area level. 

Headline findings from the Bank Lending Survey (July 2012)

The July 2012 Bank Lending Survey (BLS) reports on changes during the second quarter of 2012 and expectations of changes in the third quarter of 2012. The survey was conducted between 21 June and 5 July 2012 and received responses from 130 banks. A summary of the headline findings reported by the BLS are as follows:

• The net tightening of credit standards on loans to SMEs increased (1% in the first quarter of 2012 to 6% in the second quarter of 2012), whilst loans to large firms was relatively stable at 16% (compared with 17% in the first quarter of 2012)
• The impact of banks’ cost of funds and balance sheet constraints on the net tightening of credit standards was stable compared to the first quarter of 2012;
• Overall there were limited changes of terms and conditions on loans to enterprise by euro area banks
• Euro area banks reported a decline in demand for loans to enterprises in the second quarter of 2012, with banks expecting the decline in net demand for loans to continue during the third quarter of 2012;
• In terms of the impact of the sovereign debt crisis, banks reported that sovereign market tensions impacted more on banks’ funding conditions in the second quarter of 2012 compared to the previous quarter;
• On new regulatory capital requirements, banks continued to reduce their risk-weighted assets and increased their capital holdings in the first of 2012 in order to meet the new requirements.

Main findings of the Access to Finance Survey (April 2012) and the Bank Lending Survey (April 2012)

As previously, common themes emerge from the ECB’s Euro Area Bank Lending Survey and the Survey on the Access to Finance of Small and Medium-sized Enterprises in the Euro Area. With some exceptions the disadvantages experienced by smaller firms relative to larger entities abated somewhat when compared to the previous survey round. However, larger firms still benefit from wider sources of finance. Furthermore, while many respondents reported that conditions were less tight than in the previous period, often this meant that net tightening had diminished – but conditions were ‘less negative’ rather than overall positive.

On the demand side, issues firming up in the first quarter of 2012 include a relative easing of credit terms in many instances but a continuing divergence at the firm level between more robust economies and those with increasing macro challenges. On the supply side, much of the easing in credit availability, terms and pricing is attributable to the ECB’s two Long-term Refinancing Operations (LTROs) – three-year facilities to banks at low (±1%) margins and totalling €489.2bn in late December 2011 (across 523 banks) and €529.5bn in late February 2012 (to 800 lenders).

LTROs may be a principal cause of the more sanguine outlook for the next quarter reported by many banks but it is not yet obvious that increased liquidity at the capital markets level is feeding through to a commensurate easing of supply for firms other than the largest.

Supply vs demand side perceptions

Putting these general observations in the context of the supply side, the Euro Area Bank Lending Survey (April 2012) reports that net tightening of banks’ credit standards on loans to non-financial corporations (NFCs) in the first quarter of 2012 dropped to 9% in net terms, from 35% in the fourth quarter of 2011 (i.e. the proportion of banks reporting tightening credit standards declined). Breaking this down by size of potential borrower, small and medium enterprises (SMEs) saw net tightening fall from 28% in the fourth quarter of 2011 to 1%, in the first quarter of 2012, and larger firms from 44% to 17%. Compared with the previous survey round, the net tightening of credit standards decreased for both long-term and short-term loans. However, net tightening still applies more to longer-term (15% in the last quarter of 2011, compared to 42% in the preceding quarter) than shorter-term funding (3% in the last quarter of 2011, compared to 24% in the preceding quarter).

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Source: ECB Report on the findings of the April 2012 Euro Area Bank Lending Survey

Major drivers of these positive changes in the bank lending survey include:

• An improved environment for banks in terms of cost of funds and balance sheet constraints in the first quarter of 2012: (1) 8% reported a challenging market financing environment against 28% in the previous survey (i.e. covering last quarter of 2011); and (2) only 2% again reported liquidity issues in explaining tightening credit standards, against 27% before – though recapitalisation pressures decreased more slowly (12% against 20% before). Taken together, these factors suggest that liquidity has been improved (not least through LTROs) but that in aggregate balance sheet weaknesses remain to be addressed.
• Risk perceptions improved, notably for the economic outlook, which reduced its impact on credit tightening standards (17%, down from 40% in the previous survey). Industry-specific risks (23% in early 2012 against 30% in the fourth quarter of 2011) and concerns over collateral (11% versus 19%) were lesser factors.
• On the demand side however, a general deterioration of the availability of bank credit for SMEs across the zone – with the notable exception of Germany – was perceived and reached its highest in Greece (45%), Ireland and Portugal (both 35%), followed by Belgium, Spain and Italy.

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Source: ECB Report on the findings of the April 2012 Access to Finance Survey of SMEs in the Euro Area

While ‘access to finance’ increased as a concern for most euro area SMEs (Germany, France and Finland were the exceptions) and with SMEs expecting for the six-month period April to September 2012 a further deterioration of access to bank loans (7%) and overdrafts (8%, compared with 5% for both types of bank funds for the period October 2011 to March 2012), large firms were more optimistic on the availability of internal funds, expecting on balance an increase for H1 2012 (8%, previously 10%).

But large firms shared the expectation of SMEs for the coming six months (April to September 2012) on a likely deterioration in the availability of bank loans (10%, previously 7%) and overdrafts (9%, previously 3%).

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Source: ECB Report on the findings of the April 2012 Access to Finance Survey of SMEs in the Euro Area

Access to finance, or access to customers?

Estimates of internal funding as opposed to bank finance raise the key issue of trading environment. On average, all SMEs in the euro area noted ‘finding customers’ as their single most pressing problem – a net 27%, up from 23% in H1 2011. But ‘access to finance’ was stable as a concern compared with the previous report: 17% versus 16% in H1 2011 (the peak of 19% was reached in H2 2009).

Once again, averages hide important differences. SMEs under five years old noted both ‘finding customers’ and ‘access to finance’ about equally as pressing concerns (c.20%). But large firms (by implication, often older firms), while registering some increase in ‘access to finance’ as a concern (14% versus 11% in H1 2011), ranked ‘finding customers’ and ‘availability of skilled staff or experienced managers’ as dominant concerns (20% and 18% respectively, modestly up from 19% and 18% in H1 2011).

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Source: ECB Report on the findings of the April 2012 Access to Finance Survey of SMEs in the Euro Area

The funding window

Since external financing was not required to meet either capex or inventory or working capital needs – after all, most SMEs are having trouble finding customers – why is it being sought? The probable answer could be out of precautionary motives: perhaps many SMEs seek to borrow while they can in economies where it has been very difficult to get any credit, however SMEs only borrow when they need to and with declining turnover and profits few firms will risk unnecessary financing costs. And external funding became more important for those smaller firms with lower internal funds (7% in this survey, 6% in H1 2011).

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Source: ECB Report on the findings of the April 2012 Access to Finance Survey of SMEs in the Euro Area

Were SMEs right to have concerns about the availability of bank finance? Certainly SMEs noted supply restrictions increasing for bank loans: up to 23%, from 20% in H1 2011, and close to the 2009 high of 25%. The picture for larger firms was more nuanced: here the deteriorating economy loomed largest (36%, up from 30% in H1 2011); and their perception of a lower willingness of banks to provide a loan, while deteriorating, was less negative than that of smaller firms (15%, up from 8% in H1 2011).

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Source: ECB Report on the findings of the April 2012 Access to Finance Survey of SMEs in the Euro Area

During October 2011 and March 2012, 25% of SMEs submitted applications for a bank loan (up from 22% in H1 2011), while 47% (down from 51% in H1 2011) did not apply due to sufficient internal funds.

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Source: ECB Report on the findings of the April 2012 Access to Finance Survey of SMEs in the Euro Area

The subtle differences between larger and smaller firms persist with rejection rates. For actual outcomes of bank loan applications, 13% of SMEs reported a rejection – up from 10% in H1 2011, and the highest level since the 2009 peak of 18%. Micro firms (<10 employees) reported 20% rejection rates (previously 15% in H1 2011). A total of 62% (almost unchanged from 63% in H1 2011) of SMEs received the full amount for which they applied. But for larger firms the rejection rate was unchanged at 3%, though those not receiving the full amount applied for grew from 16% to 21%.

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Source: ECB Report on the findings of the April 2012 Access to Finance Survey of SMEs in the Euro Area

Supply side optimism?

The net easing of credit standards has already been noted, which chimes oddly with the demand side observation that SMEs reported higher rejection rates. And remember that SMEs expect on balance a further deterioration of access to bank loans (7%) and overdrafts (8% - previously 5% for both).

However, the bank survey evidence on some specifics of demand corroborates the firms’ experience: net demand for loans from non-financial corporations dropped 30% in the first quarter of 2012 (previously minus 5% in the fourth quarter of 2011). This was driven by a drop in financing needs for fixed investment (minus 36%, previously minus 20% in the fourth quarter of 2011), a decline in financing for mergers and acquisitions, and lower demands to fund inventory or working capital.

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Source: ECB Report on the findings of the April 2012 Euro Area Bank Lending Survey

Further cause for concern arises out of the mismatch of expectations between firms and lenders. The bank survey shows that in the second quarter of 2012, banks expect a rise in demand for corporate loans, whereas the survey of firms showed a rise in precautionary borrowing already in anticipation of further uncertainty (at best) or tightening in the availability of credit later. Similar expectations by banks applied in the consumer sector, with only 6% expecting a further tightening of credit standards in the second quarter of 2012.

What might make the banks generally more optimistic than firms – or consumers, the customers of the banks’ SME customers? The answer is suggested in the ad hoc questions included in the survey.

Banks were asked to assess funding conditions and their ability to transfer risk. Euro area banks believed that there had been a notable improvement in access to wholesale funding in the first quarter of 2012, though improvements were less marked in regard to their ability to securitise debt and move it off their own balance sheet. Conditions in retail financing also improved somewhat. Euro area banks expected further (if more moderate) improvements in the next quarter.

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Source: ECB Report on the findings of the April 2012 Euro Area Bank Lending Survey

The main reason for improved optimism among banks is perhaps not hard to establish: more than €1bn of LTROs made available to over 1,000 European banks. Banks also believed that their sector vulnerabilities relating to the sovereign debt crisis had abated. But banks were not able fully to shield their lending policies from residual balance sheet and liquidity constraints arising out of sovereign debt tensions.

Bringing this all together, while it would be unfair to accuse the banks of a return to irrational exuberance, their overall optimism on issues such as likely demand for credit in the near future and the terms on which it will be supplied is distinctly out of kilter with the caution expressed by their prospective SME customers, despite some easing of conditions seen by SMEs in recent months and less of a gap in the experience of small and large firms.

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Source: ECB Report on the findings of the April 2012 Euro Area Bank Lending Survey

Furthermore, those sectors with long-term challenges (construction) and those countries with increasing macroeconomic risks (Greece, Italy, Spain, Portugal) have generally seen conditions for SMEs worsen. LTROs may have taken liquidity pressure off many euro zone banks and eased sovereign debt concerns – despite further deterioration in the economies of the peripheral states. But their customers not only have a less optimistic view of access to finance, they are also generally less optimistic about finding customers as well – without which funding serves little purpose.

Perhaps the effects of major LTROs have yet to percolate down from the banks to their customers. And perhaps LTROs have provided banks with some respite in which to rebuild their balance sheets. Either way, the mismatch in outlook between banks and their customers suggests a further disconnect between financial markets and the tangible economy.

Main findings of the Access to Finance Survey (December 2011) and the Bank Lending Survey (January 2012)

The ECB’s Euro Area Bank Lending Survey and the Survey on the Access to Finance of Small and Medium-sized Enterprises in the Euro Area together, help provide an understanding of the general access to finances for the SMEs seen from both the demand-side (SMEs) and the supply-side (banks).

Consistent trends emerge from these two surveys of finance for business in the euro area, with SMEs often the most adversely affected group. SMEs still tend to have greater difficulty accessing finance than do larger corporations, funding issues may be exacerbated by structural changes such as new banking regulations, and macro conditions in each country are often mirrored at the firm level.

On the supply side, the ECB’s Euro Area Bank Lending Survey covering the final quarter of 2011 shows a continuing tightening of credit standards by euro area banks (up 35% net for non-financial corporations - NFCs) and a net decline in demand for loans to NFCs. Long-term debt (42% of respondents, against 20% in the preceding quarter) was more affected than short term (24% against 11%).

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Source: ECB Report on the findings of the January 2012 Euro Area Bank Lending Survey

While some easing of access to wholesale funding was seen in the period, this relative improvement is of marginal benefit to most SMEs as it affects the debt securities market – which individual smaller firms cannot access.

What lies behind tightening standards? In addition to expectations concerning weaker general economic activity, euro area banks cited cost of funds and balance sheet constraints: 28% had difficulties in accessing market financing (up from 20%) and a net 27% reported liquidity tightening (14%). Recapitalisation pressures affected 20% of euro area banks – up from 12%.

As for the demand side, the ECB’s Survey on the Access to Finance of Small and Medium-sized Enterprises in the Euro Area revealed an increase in SME turnover during April to September 2011 but a deterioration in profits overall as labour and other costs increased and firms continued to deleverage as a necessity, though Italian SMEs remain as outliers by increasing their ratio of debt to total assets.

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Source: ECB Report on the findings of the December 2011 Access to Finance Survey of SMEs in the Euro Area

Revealingly, the most pressing problem reported by all respondents (23%) was ‘finding customers’, and ‘access to finance’ only came second (16%) – but access to finance was again a more severe concern for SMEs than for large firms.

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Source: ECB Report on the findings of the December 2011 Access to Finance Survey of SMEs in the Euro Area

While bank financing remained the most important source of external funding for euro area SMEs, the number of firms using bank products fell slightly and SMEs perceived deterioration in the availability of bank loans (14%, up from 9%).

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Source: ECB Report on the findings of the December 2011 Access to Finance Survey of SMEs in the Euro Area

Are potential borrowers becoming discouraged? Not necessarily. While only 22% of SMEs applied for a bank loan during April-September 2011, compared with 25% in the second half of 2010, 51% did not apply because they felt they had sufficient internal funds (up from 46%) and the proportion not applying for a loan out of fear of rejection improved marginally (6%, down from 7%). The rejection rate stood at 10% (previously 11%), though only 63% reported that they had received the full amount sought, down from 66% but still better than the 56% noted in 2009.

This reduction in demand is broadly in line with the position reported in the last quarter of 2011 by the banks from non-financial borrowers, where net demand for loans fell 5%, compared with a fall of 8% in the third quarter of 2011.

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Source: ECB Report on the findings of the December 2011 Access to Finance Survey of SMEs in the Euro Area

Once again the relative weakness of SMEs compared with larger firms persists: larger firms reported a 3% rejection rate (previously 2%) and a higher success rate at 78% (up from 73%). All sizes of firm experienced an increase in interest rates charged, and looking to the future all categories of firm expect access to bank facilities to deteriorate – though large firms are more optimistic than SMEs on the availability of internal funds. Responses on margins mirrored the supply-side data, where 44% of banks revised up their margins on average loans (18% in the previous quarter) and 49% for riskier loans (31%).

Common drivers underlying these trends include the intensification of the sovereign debt crisis across the euro area, regulatory tightening and the economic circumstances of individual euro members, with smaller firms generally being more adversely affected as a result:

• Weaker financial positions of governments lowered the funding benefit banks derive from implicit or explicit government guarantees.
• Money market financing has become more difficult in all euro area countries.
• The health of a firm’s national economy also has a material impact, with both interest rates and other borrowing costs being reported by SMEs as considerably higher in Ireland, Greece, Spain, Italy and Portugal than in Belgium, Germany, Holland or Finland.
• Availability of bank loans continued to be particularly weak in Ireland, Greece and Portugal.

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Source: ECB Report on the findings of the December 2011 Access to Finance Survey of SMEs in the Euro Area

In short, macro and micro trends amplify each other as a weak economic outlook leads to lower investment and reduced lending. The downturn is prolonged because of the weakness of the financial sector, usually the ‘transmission mechanism’ for growth. And SMEs are affected most of all because of their relative dependency on bank funding at a time when new regulation and the need to rebuild balance sheets conspire together to make banks more cautious. In the past six months, improvements in banks’ capital positions have been driven more by issuing new equity than by retained earnings.

One policy response has been for the ECB to provide considerably expanded cheap lending to some 800 banks across the European Union - €489bn in December 2011 and a further €530bn in February 2012. In addition to enabling banks to improve their liquidity, these new bonds may help ease sovereign debt strains as banks use affordable ECB loans to buy government bonds.

However, with the transmission mechanism of the banking sector still not fully repaired it may take a while yet for improvements in bank liquidity and sovereign debt to ripple through to the SME population.