Substitution effects in SME finance

Abstract

We investigate whether SMEs with demand for credit increase their trade credit usage after they experience a negative shock to bank credit. We base our analysis on a large sample of SMEs from the five biggest European countries. First, SMEs’ ability to substitute largely depends on their credit quality. Second, substitution decreases during the financial crisis of 2007-09. Third, high credit quality firms with moderate financial constraints are the most likely to substitute. We confirm these results on a subsample with matched bank-firm data. The evidence highlights the limits of substitution in SME finance.