Small and medium-sized enterprises (SMEs) are among the most severe casualties of the credit crisis. Despite sharp cuts in interest rates by central banks around the world and various stimuli injected into financial sectors, banks continue to focus on the bigger-ticket names that provide safer deals that earn higher fees.
Political calls for higher lending to SMEs is counterbalanced by those who believe that it would not be responsible to lend to poor or failing businesses that have benefited from the cheap credit widely available over the past few years.
But it is not only 'bad' businesses that have troubles accessing credit. Anecdotal evidence in the UK, for example, indicates that even entrepreneurs who have managed to sustain, if not increase, revenues during the crisis are still struggling to access immediate funds. Cautious, centralised approval may be granted, but it tends to come when it is too late and the small company in question has had to give up an additional business opportunity which would have been financed by a bank loan.
Exploring alternatives
Small businesses are looking for alternatives. 'Crowfunding', raising small sums from a large number of investors, has become less unusual, as have invoice financing and resorting to personal credit cards or to networks of friends and family to finance business costs.
The Banker's global SME lending survey, carried out in association with the International Federation of Accountants, has confirmed that the number of loan applications received in the first half of 2009 was lower than the same period last year. This is partially due to reduced activity and a reduced number of companies in the market.
The picture is different, however, in different parts of the world. A Nigerian bank, for example, reports that demand for SME loans has increased since the beginning of the year due to higher entrepreneurial spirits as a consequence of job losses and a lack of employment opportunities. An increased focus on microfinance has also helped. "More people are venturing into business as they realise it is the best way to create value," says one banker. "People of the generation that is now in its mid-30s and mid-40s are developing a passion for entrepreneurship." On the other side of the globe, a Seoul-based lender has also seen a much higher number of requests, in this case due to governmental support to small businesses.
Loan approval falling
A total of 559 banks participated in the survey and offered their views on the SME lending market. Of the 196 comments on lending volumes, 42.8% stated that fewer applications were received in the first half of this year compared with the same period last year. The number of approved applications confirms that lending activity has slowed down: 48.6% of respondents approved fewer applications than last year. Bankers are facing reduced lending capacity and are adopting tighter credit risk management policies.
Looking ahead, banks display a more optimistic attitude towards lending, with a large proportion of the respondents planning to either raise the number of new loans approved (23.1%) or increase loan amounts to existing clients (20.8%).
In uncertain times, it is only natural to request some type of security. Factors that traditionally play a discriminatory role in loan applications - such as cashflow information, collateral, audited accounts and customer history with the bank - have an even heavier weighting. Not surprisingly, the vast majority of lenders require corporates' financial statements to be audited.
Other indicators that would have previously played a less important role have now become crucial. These are industry trends, key risk indicators and, despite the bad publicity that rating agencies have attracted as the financial crisis unfolded, credit ratings have become much more significant. Beyond the hard figures, personal information becomes more relevant in a recession. Personal guarantees and directors and management profiles have had a higher weight in lending decisions since the beginning of this year.
The results show that when looking ahead to the next few years, banks' outlook is similar, indicating that their prudence towards SME lending is not likely to diminish.
