Studying Small Business Financing Across Countries

I have spent a good deal of time over the last four years working on surveys asking individual companies about how their business activities are financed. 

It’s been amazing in that process to see how differently the topic must be discussed in Europe and the United States. Specifically, topics like credit card financing, which are a mainstay of U.S. surveys, don’t even make an extended pick-list of financing types used by most European small businesses. 

I bring this up to illustrate that international comparisons of financing mechanisms for small business are a tricky thing. And yet, we all yearn for more comparable data (or any data at all!). 

Today I wanted to describe a couple of fairly recent surveys focused on small business financing data internationally. 

Asking the Firm about Financing

Completed every six months, the European Central Bank Access to Finance of SMEs is a large-scale survey of establishments in the EU zone looking at changes in conditions but not gathering nominal values of loans. 

It has a nice questionnaire that keeps things simple although the overall effort is a bit limited in that it's bypassing official statistical systems and doesn't have the ability, as I understand it, to link reported credit conditions to firm outcomes in later periods. 

Its most recent report summarized that “between March and September 2010 the proportion of SMEs reporting a worsening in access to bank loans, at 24%, almost halved compared to the previous survey, when it stood at 42%. At the same time, 12% of SMEs reported an improvement in access to bank loans, compared with 10% in the previous round.” 

This seems to show that the debt financing options for European SMEs are still getting worse but not as quickly. This is a good example of a survey gathering perceptions from businesses. The recently reviewed NFIB survey also comes to mind here. 

Asking the Regulator (or Bank) about Financing

The other route that can be followed in gathering data is to go to the providers of capital. In most cases, in small business financing this means looking to providers of debt capital. 

A new paper by the World Bank titled “Small and Medium Enterprises: A Cross-Country Analysis with a New Data Set” describes an aggregation of SME financing data of this type from multiple countries around the world. 

This arises from some of the efforts of the World Bank and G-20 to aggregate data from central banks and other administering agencies about the size and quantity of loans to small businesses in their country. 

Asking regulators about loans is quite different than the above described establishment surveys. The advantage of the second approach is that it’s much cheaper but as the authors outline, there are huge definitional differences across countries in how SMEs are defined. 

From table 2 of “Small and Medium Enterprises: A Cross-Country Analysis with a New Data Set”

The above shows the U.S. definition which centers on loan size, not employees or revenues of the business; I find this to be highly unsatisfactory. So while I applaud this G-20/World Bank effort, I personally still don’t think it’s a full substitute for a quality establishment survey. 

That said, outlining some of these differences in definitions is the first step in pushing towards further agreement on appropriate definition and comparability. The authors have tried to make global estimates on the size of small business lending, finding that $10 trillion flows annually to small business loans but that this is disproportionately higher in developed economies. 

Additionally, they believe the differences in definitions are not driving the difference between developed and developing economy levels of small business financing.

A Gripe

While there is much to applaud in the ECB survey, they still have work to do in regard to their sample. 

Specifically, it does not appear to me that their sample is adequately covering new and young firms. While they have about 2 percent of firms responding that they are under 2 years of age, that is dwarfed by those firms age 2-4 years (8 percent of their sample). 

This would appear low by all estimates I can think of coming out of the OECD and other international sources. And indeed, in this turbulent time we have shown the importance of tracking new business finance separately as these are the firms most likely first effected by the downturn and any credit tightening. 

Take a look at Spain’s statistics on new business registrations, as an example, which have halved in the last year. The discussions about small business financing too often are portrayed as the same as new business financing. They are not, and more effort needs to be made to have samples which allow for representative studies of credit conditions faced by new businesses.

A Compliment and A Call

But it’s great to be squabbling on the details of the ECB effort while the U.S. remains devoid of meaningful ongoing federal collections at the establishment level. 

Our own Kauffman Firm Survey is the only longitudinal effort collecting annual debt and equity injection information on U.S. businesses but it’s only one cohort. 

How we are not demanding more on business financing is baffling to me. Communities everywhere in the U.S. want to know what is happening with their small business credit conditions.

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