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

“A lot of SMEs don’t get all the financing they ask from banks in Europe […] It is more costly for SMEs to get a loan from a bank than for bigger companies, especially in countries worst hit by the crisis.” European Commission (2015a), Capital Markets and SMEs in the EU, 30th September. The chapter investigates SMEs sources of funds for the purpose 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 lamented by SMEs stems from excessive leverage. Indeed, our analysis shows that more equity and not more debt 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 for smaller companies if they are already highly geared and that it must be complemented by interventions aimed at improving SMEs access to equity finance.