SME sources of funding: more capital or more debt to sustain growth? An empirical analysis

This chapter investigates funding sources available to SMEs as a means of understanding whether difficulties in accessing bank credit stem from the characteristics of the SMEs applying for financing. Based on creditworthiness measures applied to over 500,000 yearly financial statements of euro area SMEs in the 2006–2014 period, we find that the credit crunch experienced by SMEs stems from excessive leverage requirements. However, our analysis shows that more equity is necessary for growth and confirms that an expansionary monetary policy, even based on extremely low or negative interest rates, may not lead to more credit being extended to smaller companies if they are already highly geared; and that a successful policy must be complemented by interventions aimed at improving SME’s access to equity finance.