SMEs wary of bank borrowing

Small and medium-sized enterprises (SMEs) rarely turn to banks for credit because of their low rates of growth and their owners’ conservative approach to borrowing, a study shows. The study was conducted by research company Hellastat, which analyzed the financial results of 27,000 firms in the period 2002-2004. SMEs finance themselves indirectly, by increasing their liabilities to procurers, for example, while bigger enterprises borrow from banks or issue corporate bonds. Among SMEs, interest-bearing loans account for 19.2 percent of total liabilities for commercial firms, 21.5 percent for manufacturing firms and 19.5 percent for services firms. Among all enterprises, loans account for 39.6 percent of commercial firms’ liabilities, 52.1 percent for manufacturing firms and 57.9 percent for services firms. Companies with a turnover of up to 1 million euros are less likely to borrow from banks. This is especially true of those in the manufacturing and services sectors. The ratio of other capital to own capital for manufacturing SMEs is 0.62 and for services SMEs just 0.28. Last year, commercial SMEs cut their total borrowing by 5.1 percent, while services SMEs cut it by 9.3 percent, while it increased marginally (0.6 percent) for manufacturing SMEs. It is true that, when one examines the SMEs’ size and growth rates, it would seem unlikely that they would seek extra credit. Still, the question needs to be answered: Do banks avoid lending to SMEs or is it that the latter cannot stand more credit? According to Hellastat, about 30 percent of the enterprises examined have a turnover of under 1 million euros. Among them, commercial sales declined 0.7 percent in the period 2002-2004 and profits increased only marginally (0.4 percent). Among manufacturers, turnover increased by 1 percent but profit declined 2.3 percent, while among service firms both turnover and profit declined (2 percent and 2.5 percent, respectively). During the same period, the bigger enterprises saw turnover increase by 5 to 10 percent and profits rise 5 to 12 percent, depending on sector. Because of their reluctance to borrow, SMEs have a better chance of paying back their bank liabilities. Their short-term liabilities to banks over sales ratio is significantly lower than that of the average for all enterprises (9.8 percent versus 19.8 percent in commerce, 13.7 percent versus 25.8 percent in manufacturing and 0.8 percent versus 11.3 percent in services). Total outstanding banking loans to all Greek enterprises reached 56.9 billion euros at the end of 2004, up 8.2 percent on 2003. Liabilities to banks account for 51 percent of total enterprise liabilities, which stood at 110.96 billion euros. among the bank loans, 77 percent are short-term ones that allow enterprises to overcome acute liquidity problems and pay their employees and suppliers, among others. Among commercial enterprises, 60 percent of liabilities involve credit by suppliers. Commercial enterprises have relatively more liabilities (115 percent of own capital) relative to other enterprises (50 percent). «It is natural for SMEs to resort to operational credit, where the process is more informal,» Hellastat observes. «On the other hand, banks have considerable misgivings about lending to SMEs, mainly because of the lack of a reliable assessment framework,» it adds.

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