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
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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 canÌýpolicy makers take from these findings?Ìý
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Targeted finance works with a few caveats:Ìýschemes to ease access to cheaper finance are highly effective if disbursed with discretion.ÌýWhile small businessesÌýaccount forÌýnearlyÌýtwoÌýthirdsÌýofÌýjobsÌýin the UK’s private sector,Ìýit’sÌýunproven that blanket supportÌý– such as the loans and furlough schemes extended in the UK duringÌýthe CovidÌý19ÌýpandemicÌý–ÌýwillÌýproduceÌýthe sameÌýresults.ÌýThese schemes must beÌýpreciselyÌýdesigned,Ìýtargeted and reviewed.ÌýÌý
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Blanket support is not proven to deliver the same benefits over different business cycles:Ìýfindings suggestÌýtargeted loan guaranteesÌýareÌýineffectiveÌýduring good timesÌý–Ìýit’sÌýonlyÌýduring recessionsÌýthatÌýtheseÌýsmall businessesÌýbenefitÌýfrom a credit boost.Ìý
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Eligibility criteria differ for different economies:ÌýtheseÌýtargetedÌýfirms areÌýprobably amongÌýthose whoÌýbenefitÌýfrom smoothly functioning capital markets duringÌýgoodÌýtimesÌýandÌýdon’tÌýneed government supportÌý– possiblyÌýan indicationÌýthat the threshold for eligible firmsÌýin PortugalÌýwas set too highÌýduring the expansion period.ÌýGiven the UK’s concerns overÌýlacklustreÌýproductivity,Ìýit’sÌýpromising that we seeÌýmild benefits from this targeted supportÌý–ÌýeligibleÌýcompanies became more productive, although these effectsÌýtook time toÌýemerge.ÌýÌý
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NarrowedÌýgapsÌýbetween levels of productivityÌýacross industries:Ìý–Ìýaccording to economic models,Ìýthese findings reflectedÌýthat capital is betterÌýallocatedÌýamong businesses,Ìýpossibly allowingÌýcompanies to improve their productivity.Ìý
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Employment effects are mixed:Ìýwhile there was a net uptick in job numbers, we also deduced that companies investing seemedÌýalsoÌýtoÌýlose some roles.ÌýCould it be that companies buying new equipment might be hiringÌýnew staffÌýtoÌýoperateÌýit?ÌýDepartingÌýemployees remained unemployed – an impact that policy makers will certainly care about.ÌýÌý
What canÌýbanksÌýandÌýsmall businesses do?Ìý
This was a tightly targeted programmeÌýwhich removed much, but not all, of the risk for banks themselves. We discovered that many small businessesÌýdidn’tÌýknow about the support on offer and that take up was low in theÌýearly stages. Could banks act as important go-betweens to communicate available schemes to relevant small businesses?ÌýÌý
Small business leaders reported thatÌýthe bureaucracy involved in applying for a loan was too arduous – but our research shows thatÌýit’sÌýworth the effort.ÌýCompanies 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.Ìý
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Targeted credit guarantees can be a powerful tool to preserve jobs, sustainÌýinvestmentÌýand strengthen productivity. The Business School’s research suggests this is successful only when deployed selectively and at moments of genuine financial stress.Ìý