Innovations and Financing of SMEs Part I: SME Financing and Credit Rationing: The Availability of Funds

Innovations and Financing of SMEs Part I: SME Financing and Credit Rationing: The Availability of Funds

David S. Walker (The University of Birmingham, UK) and Horst-Hendrik Scholz (The University of Birmingham, UK)
DOI: 10.4018/978-1-61350-165-8.ch030
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Abstract

Small and Medium-sized Enterprises (SMEs), as a major sector of the economy, have unique characteristics in terms of organisational and financial structures; reflecting the interest and strategy of the owner and financiers. With regard to the recent global financial crisis, the terminology ‘Credit Crunch’ describes a shortage in financial funds and concerns most businesses as well as financiers. On the one hand, financiers (lenders) complain about weak financial structures (especially lack of equity) and high risks investments of innovations and on the other hand SMEs (borrowers) accuse financiers for a shortage of financial funds or non-transparent and demanding credit conditions. This chapter describes various financing options and gives rationales for the credit rating process and credit conditions building the base for financing decisions. Furthermore, by discussing the topic of ‘Credit Rationing’, the authors demonstrate the impact of credit conditions on management decisions in order to justify the rationing of credits. This chapter also provides the necessary introduction and background to the understanding of the next chapter “Part II: Case Study of German SMEs in 2010”.
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Background

In Europe, the degree of bank financing is high in comparison to financing through financial markets—especially compared to the USA. In the USA, bonds take an 80% share of debt financing and bank financing only 20%--while in Europe bank loans have an 80% share of debt financing (Schinkel, 2010). Therefore banks play a very important role in financing in Europe and it is worth it to have a closer look to the credit market and credit rationing. Due to the fact that most Small and Medium-Sized Enterprises (SMEs) are limited companies, rather than quoted companies, the access to financial markets is limited. Looking at the current financial crisis with a focus on the interplay of financiers and SMEs, companies are complaining about the so called Credit Crunch causing a shortage in funds. Financiers on the other hand complain about weak financial structures in terms of debt/equity ratios causing higher risks of losing loans. Non-traditional financing, with a potential to fill traditional financing gaps, offers especially to entrepreneurs an improved business framework; even though there are concerns about the dependence on financiers.

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