What really helps SMEs through downturns?
Can banks and policy makers help small businesses through recessions?
Article at a glance:
Cláudia Custódio’s study examined an ongoing Portuguese plan to help healthy small businesses during the 2008 economic crisis and the decade that followed. Key findings include:
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Targeted credit guarantees can be a powerful tool to preserve jobs, sustain investment and strengthen productivity. This is successful only when deployed selectively and at moments of genuine financial stress. There were no discernible benefits during times of growth.
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Well-designed schemes support viable firms, rather than propping up unproductive ones.
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Banks and business leaders play a critical role in ensuring support reaches firms that can use it productively
Small businesses are the backbone of most national economies, accounting for 90 per cent of businesses worldwide (World Bank) and 99 per cent of UK businesses. And there are many government initiatives to help them - but some schemes risk propping up inefficient and failing ventures.
Our research examined an ongoing Portuguese plan to help healthy small businesses during the economic crisis of 2008 and into the decade that followed. By using state of the art research methods, the results showed without doubt the positive impacts – and when support was no longer effective.
Amid a worldwide credit squeeze in the wake of the downturn, the Portuguese government offered these firms access to cheaper, largely guaranteed bank loans – thereby removing most of the risk for banks. Their eligibility was decided based on annual reviews and criteria such as sound finances and performance.
The study looked at a decade’s worth of data which ran beyond the recession and the subsequent sovereign debt crisis in the Eurozone and on into years of economic expansion. And the results are clear. In times of economic crises, small businesses which benefitted from cheaper guaranteed credit tended to invest more, recruit more staff and were more likely to become exporters. During this time the scheme boosted growth and appeared to improve productivity.
But importantly, cheaper guaranteed credit only had an impact during economic downtimes – there were no discernible benefits during times of growth.
What canpolicy makers take from these findings?
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Targeted finance works with a few caveats:schemes to ease access to cheaper finance are highly effective if disbursed with discretion.While small businessesaccount fornearlytwothirdsofjobsin the UK’s private sector,it’sunproven that blanket support– such as the loans and furlough schemes extended in the UK duringthe Covid19pandemic–willproducethe sameresults.These schemes must bepreciselydesigned,targeted and reviewed.
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Blanket support is not proven to deliver the same benefits over different business cycles:findings suggesttargeted loan guaranteesareineffectiveduring good times–it’sonlyduring recessionsthatthesesmall businessesbenefitfrom a credit boost.
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Eligibility criteria differ for different economies:thesetargetedfirms areprobably amongthose whobenefitfrom smoothly functioning capital markets duringgoodtimesanddon’tneed government support– possiblyan indicationthat the threshold for eligible firmsin Portugalwas set too highduring the expansion period.Given the UK’s concerns overlacklustreproductivity,it’spromising that we seemild benefits from this targeted support–eligiblecompanies became more productive, although these effectstook time toemerge.
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Narrowedgapsbetween levels of productivityacross industries:–according to economic models,these findings reflectedthat capital is betterallocatedamong businesses,possibly allowingcompanies to improve their productivity.
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Employment effects are mixed:while there was a net uptick in job numbers, we also deduced that companies investing seemedalsotolose some roles.Could it be that companies buying new equipment might be hiringnew stafftooperateit?Departingemployees remained unemployed – an impact that policy makers will certainly care about.
What canbanksandsmall businesses do?
This was a tightly targeted programmewhich removed much, but not all, of the risk for banks themselves. We discovered that many small businessesdidn’tknow about the support on offer and that take up was low in theearly stages. Could banks act as important go-betweens to communicate available schemes to relevant small businesses?
Small business leaders reported thatthe bureaucracy involved in applying for a loan was too arduous – but our research shows thatit’sworth the effort.Companies who benefitted were those judged to be in good financial health, without too much debt or too many unpaid bills – it pays to keep your house in order.
Targeted credit guarantees can be a powerful tool to preserve jobs, sustaininvestmentand strengthen productivity. The Business School’s research suggests this is successful only when deployed selectively and at moments of genuine financial stress.
