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Estimating the financing gap of small and medium-sized enterprises

While small and medium-sized enterprises are important for economic growth and employment, we have little insight in their financing needs. Using a novel methodology, this column presents new research that estimates the gap between demand and supply of financing in several European countries. We find that the financing gap is three to five times larger than that of US SMEs. Initiatives under the Capital Markets Union umbrella can help to reduce this financing gap.

Why worry about the financing of small and medium-sized enterprises (SMEs)? In recent years, SMEs appear to have been severely underfunded (Beck et al. 2014). Firms with fewer than 250 employees are important players in all sectors within an economy. In Europe, there are more than 21 million companies in the SME sector, employing nearly 90 million individuals and thus contributing significantly to total job creation. Table 1 provides a definition of SMEs. In Europe, the percentage of employed persons working for SMEs lies between 60 and 70% (Lopez de Silanes et al. 2015).

The SME sector is thus significant for both economic growth and employment, which consequently implies that when the SME sector is negatively affected, economic growth and employment suffer. Indeed, relative to larger firms in the economy, the sector is extremely sensitive to external market shocks: severe economic conditions or changes in economic regulations. Some of the main causes of higher sensitivity are risks associated with small-scale businesses, lack of experience, low productivity, having a primary focus on local markets, and the naturally high rate of bankruptcies. The direct consequence of higher sensitivity to external market shocks is limited access to short- and long-term financing. That is an important reason for the further investigation of the financing constraints affecting the SME sector.

Table 1. Definitions of SMEs by the European Commission

Source: EC.

An important focal point of prior research on SMEs is to understand their dependence on credit and cash flow. SMEs face numerous obstacles in borrowing funds because they are small, less diversified, and have weaker financial structures. Indications that SMEs are financially constrained are: payment delays on receivables, declining liquidity,1 and an increase in SME insolvencies and bankruptcies. Besides the market signals that make SME sector firms unfavourable borrowers, SME firms find it difficult to provide high quality collateral at all times or insure transparency with respect to their creditworthiness (Ayadi and Gadi 2013).

Widespread financing gap

In recent years, policymakers and researchers have increasingly begun to explore the differences in SME lending across countries and among bank ownership types (IFC 2010). While the literature examines the impact of differences in institutional and organisational structures and pricing of bank financing to SMEs, researchers have rarely focused on the differences between the supply and demand of financing to SMEs to determine if a financing gap exists in the debt and equity markets (EIB 2013). Our study (Lopez de Silanes et al. 2015) is the first pan-European study of its kind to estimate the difference between supply and demand of SME financing in order to quantify the financing gap in five European countries: Germany, France, the Netherlands, Poland and Romania.

In our study, we use publicly available data on SME outstanding loans and issued equity in order to estimate the supply of SME financing. For the demand for loans and equity among SMEs, we use the Survey on the Access to Finance of Enterprises of the ECB (SAFE ECB Survey) and publicly available data. The survey focuses on the EU member state countries, where small and medium enterprises are randomly selected and weighted based on economic importance. The survey relies on data from statistical offices, as well as on data collected through surveys which greatly helps in assessing financing demand.

We rely on the methods used in the EIB (2013) study, but we expand it in several dimensions. First, we estimate supply and demand using different sources of data in order to ensure a full overview of the currently available data on SME financing supply. Second, we apply different methods in order to estimate the financing demand. These different methods help us to avoid the sample selection issue that the EIB study suffers from. Specifically, the EIB study estimates the average loan demand by observing only the sample of loans that were obtained. We correct for this issue and include different sizes of obtained versus desired loans. In addition, we estimate the loan demand of those firms that applied for but were rejected for a loan. Finally, our study focuses on a different set of countries – France, Germany, the Netherlands, Poland and Romania, which we refer to as ‘research countries’.

In order to provide a contextual meaning to the estimated numbers, we compare them with the SME loan and equity gap in the US. While not approaching pre-crisis levels, the credit conditions for US SMEs are better than for EU SMEs. At the same time, the EU and the US have similar institutions and market structures, which makes policy recommendations easier to benchmark. To estimate the US SME loan and equity finance gap, we rely on publicly available data and published studies.

Table 2 shows the estimated SME financing gaps in these research countries and the US. The table highlights the results of our report (Lopez de Silanes et al. 2015).

Table 2. Spread of the financing gap (as % of GDP) in 2013

The first row of Table 2 shows that the US loan gap ranges from 1.12% to 2.25% of GDP. The largest loan gap spreads are in Poland and the Netherlands. The lower boundary of the loan gap is the lowest in Romania. The upper boundary of the loan gap is the lowest in Romania and highest in the Netherlands and Poland.2 Table 2 shows that the US loan gap is smaller than that of the EU countries in this study. It also shows that all five countries, regardless of the quality of the institutions and the level of financial development, suffer from an undersupply of loans.

The second row of Table 2 shows that the US equity gap ranges from 0.96% to 1.52% of GDP. The lowest lower boundary of the equity gap is in the Netherlands, while the highest lower boundary is in Romania.3 The estimated equity gaps suggest that there is a significant difference between the estimated demand and supply of equity, which is on average 3% of GDP. The SME equity gap in the research countries is significantly larger than that in the US. The importance of equity should be highlighted, as well-capitalised SMEs are able to mobilise further debt. Filling the equity gap is thus more efficient than filling the loan gap.

Finally, the third row of Table 2 shows that the total estimated SME financing gap in the US ranges from 2.30% to 3.78% of GDP. The most important conclusion from the overview of the total gaps is that the SME financing gaps of the Research Countries in Europe are three to five times larger than that of the US.

Concluding remarks

The financing gap for SMEs in Europe is substantial. There are several ways in which governments can contribute towards improving the flow of debt and equity to SMEs: providing knowledge about alternative forms of financing, improving loan support and guarantees, enhancing access to long-term financing and promoting non-bank financing alternatives. The Capital Markets Union can play an important role in the provision of equity (better disclosure and listing rules) and debt (introduction of private placement markets).

Authors' note: The report was sponsored by the Dutch Ministry of Finance and the European Bank for Reconstruction and Development (EBRD).


Ayadi, R and S Gadi (2013), “Access by MSMEs to Finance in the Southern and Eastern Mediterranean: What Role for Credit Guarantee Schemes?”, MEDPRO Technical Report No. 35/April.

Beck, T, H Degryse, R De Haas and N Van Horen (2014), “When Arm’s Length is Too Far”, VoxEU,  25 July.

European Investment Bank (2013), “Private Sector Financing and the role Role of Risk-bearing Bearing Instruments”, November, Luxembourg.

International Finance Corporation (2010), “Scaling-Up SME Access to Financial Services in the Developing World”, Financial Inclusion Experts Group, G20 Seoul Summit.

Lopez de Silanes, F, J McCahery, D Schoenmaker, and D Stanisic (2015), “The European Capital Markets Study: The Estimation of the Financing Gap of SMEs”, Duisenberg School of Finance, Amsterdam.


1 In the Netherlands, 50% of SMEs have to deal with longer payment terms from their customers.

2 While the upper boundary of the loan gap for SMEs is highest for the Netherlands, total outstanding loans for all companies is above 50% of GDP in the Netherlands, and below 40% in the other four countries.

3 The Romanian equity demand estimates suffer from the data issue of too few observations (see Lopez de Silanes et al. 2015).

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