Not so different: SME financing patterns in Europe and United States

​Upcoming edition of News & Views reports on new data showing banks remain primary source of finance for companies on both sides of Atlantic.


>> See the analys​is








​​​​​BRUSSELS, 23 May 2016  Newly published US Census Bureau data shows even greater reliance on bank lending by small and medium-sized businesses (SMEs) than previously thought.

The U.S. Census Bureau 2012 Survey of Business Owners released last December gives fresh support to ESBG analysis first published in September last year that SMEs have a healthy appetite for debt financing through banks in both the European Union and the United States for business creation and expansion. U.S. loan activity to SMEs start-ups climbed to 87.35% from 85.11% in 2007. Finance activity for business expansion rocketed up nearly 20 percentage points from 47.36% to 64.09%. The jump was partially due to a drastic reduction of in the use of grants when starting a company in the US market, falling by 2.2 percentage points to 0.31% from 2007 to 2012. When financing SME expansion, grant use tumbled from 24.91% to just 0.53%. This drop was only partially offset by government-guaranteed business loans from a bank or financial institution.

 

Why the new data is important

The ESBG has always argued throughout the current Capital Markets Union policy debate that savings and retail banks know the SME financing story as well as anyone. In the December 2015 edition of News in views, ESBG Managing Director Chris De Noose noted that some argue that a US-style capital markets will loosen SME finance flow. The ESBG analysis updated in May​ continues to show otherwise. For SMEs, bank lending remains, and will remain, front and centre in the European Union as well as in America. A 2014 Commission survey on access to finance of enterprises show 62% of SMEs choose bank loans over other forms of financing to expand. Peeling through data, we find Old World lending activity to SMEs virtually the same as in the not-so-New. A US Census study points to American business owners, like their European counterparts, also opting for bank financing. In fact, 70% of those firms – employing less than 500 employees – use banking products to start or acquire a business.

Despite some significant differences between the European Union and United States in terms of the size of their respective capital markets and of their banking system, some subtle elements tend to mitigate that trend.  It's no longer fair to simply say that U.S. capital market is robust but its banking sector is comparatively small or that Europe has an enormous banking sector but minute capital market.

 

SMEs: 99 per cent of all companies

What remains clear is that companies in general, both in EU and US markets, 'rely heavily' on banks to finance them and are both vulnerable to the tightening of bank lending. The size of the capital markets or of the banking sector is irrelevant in this regard and might be more indicative of the way the largest companies of both regions get their financing. The 'US model' that is better at financing companies, and in particular SMEs, therefore does not exist. Companies in the U.S. market are also not any less vulnerable than their EU counterparts to the tightening of bank borrowing. It's quite the contrary: American companies resist less the urge to seek their bank in times of crisis. That said, it becomes clear that there is no U.S. model to import across "the pond" and trying to do so would only damage access to finance in the European Union.

Boosting the amount of bank lending available is the most efficient policy response to the overall lack of funding. Opening more access to capital markets financing will surely benefit companies that are not fit for bank lending, but will have no relevance for the other 99% of companies that form the backbone of the EU economy.

See this story and more on SME financing in the upcoming edition of News & Views to be published later this month.

>> See the ESBG analysis​​


SME finance; Capital Markets; Capital Markets Union