Bank lending constraints, trade credit and alternative financing during the financial crisis: Evidence from European SMEs

Using euro area firm-level data since the recent financial crisis, we test whether bank lending constrained small- and medium-sized enterprises (SMEs) are more likely to use or apply for alternative external finance including trade credit, informal lending, loans from other companies, market financing (issued debt or equity) and state grants. Our constraint indicators identify both credit-rationed firms and firms that self-ration due to high lending costs. We find that credit-rationed firms are more likely to use, and apply for, trade credit. This increases with firm size and age. We also find that constrained firms are more likely to use informal lending or loans from other companies but find no evidence that bank-constrained SMEs apply for, or use, market finance. Smaller, self-rationing borrowers are more likely to apply for grant finance. Finally, we find that firms denied credit for working capital tend to turn to trade credit, while informal and inter-company lending tends to act as a substitute for bank investment loans.