Abstract
1. Purpose
This paper examines the characteristics of Irish SME’s using non-bank debt and in particular looks at the extent of discouraged borrowers using non-bank debt.
2. Design / Methodology / Approach
Probit regression model was run on an unique database of Irish SME’s.
3. Findings
Borrower discouragement significantly increases the probability that a SME will use non-bank finance. The magnitude of the effect is significantly stronger when discouragement is interacted with firm size.
4. Research Implications
The non-bank SME finance market is an emerging one, particularly in Ireland. This paper aids our understanding of the firm characteristics that lead to an increased use of non-bank finance. The results of this study indicate that non-bank finance is extending the reach of the SME finance market to borrowers who have been rejected by banks.
5. Practical Implications
SME’s are the bank bone of the Irish and European economy. In Ireland small and medium sized enterprises accounted for 99.8% of the total enterprise population for 2014 and accounted for 69% of employment. (CSO 2014). Borrower discouragement has become increasingly important given that the rejection rate on bank finance applications has increased from 11% to 13% (Central Bank March 2017).
6. Social Implications
This study evaluates the effectiveness of government policy to diversify the SME funding landscape. Given the importance of SME sector to the economy, particularly in provincial locations, the resultant impact on the demand and supply of finance for SME’s has and will have a wider impact on the real economy
7. Originality
The government’s policy directive to diversify the funding landscape of SME’s is a recent one, such that the growth in the non-bank sector is also recent. To date there is limited research in the sector.
8. Keywords: SME, Discouraged Borrower, Non-Bank Debt, Alternative Finance.
