A recent study by the OECD into the state of financing for small to medium enterprises (SMEs) in the aftermath of the Global Financial Crisis (GFC) has found that businesses in this sector have been the most adversely affected, according to a report in Business Spectator.
The ability for small firms to access finance is one of the most significant issues affecting the health of our economy. Small businesses typically obtain their funding for start-up and early stage growth from a combination of the founder’s savings, credit cards and investments by family and friends.
Bank loans are often harder to secure for start-up ventures, but personal loans taken out by the directors are common. Very few small firms secure venture capital funding, despite the high profile that it receives in the media.
Impact of the GFC The GFC of 2008-2009 had a significant impact on small businesses around the world. Across the 34 advanced economies that comprise the OECD, the GFC saw GDP contract by an average of 3.5 per cent and unemployment jump by around 9 per cent (much higher in some countries). Apart from the negative impact the GFC has had on public sector debt; its effects within the SME sector have been significant.
According to the OECD the performance of SMEs was severely impacted by the GFC. Significant declines have been recorded in output, sales, employment and exports. While the deepest impacts occurred in 2009, the effects continued well into 2010, and the ripples are still being felt.
Bankruptcies One example of this impact was the rate of bankruptcies among businesses. Between 2007 and 2010 the level of bankruptcies across the OECD rose significantly. For example, in the United States the total number of bankruptcies jumped from 28,322 in 2007 to a peak of 60,837 in 2009, and was still at 56,282 in 2010.
The figure shown above is from the OECD and shows the number of new enterprises and percentage change across a range of countries over the period from 2007 to 2009. It can be seen that the total number of enterprises fell dramatically across all countries with the exception of France in 2007-2008 and generally continued through 2008-2009.
Impacts on Australian business. There has been a squeezing of credit supply to small firms as a result of the GFC. For micro enterprises (e.g. those with fewer than 5 employees), the need for bank financing is generally low. As a result these firms were less affected. However, for the larger end of the SME sector the lack of access to bank financing was a problem.
Small and medium sized firms are important members of industry supply chains and we have seen some recent examples of such firms being forced into administration or bankruptcy in the automotive parts and transport sectors. The Insolvency and Trustee Service Australia provides data on bankruptcies. Over the period 2007-2010 bankruptcies rose from 25,249 to 27,509. They have subsequently fallen to 23,093 last year.
