The Financing of Small and Medium-Sized Enterprises: An Analysis of the Financing Gap in Brazil

Abstract

While small and medium-sized enterprises (SMEs) are important for economic growth and employment, they face numerous obstacles in accessing external finance. In this article, we review recent developments in the availability of financing for SMEs in Brazil, focusing on the greater use of equity and debt for SMEs. In assessing the barriers to external financing, we focus on the role of bank characteristics, market structure and variations of interest rate spreads across banks and time. Moreover, as banks retreat from SME financing, we examine the potential for SMEs to seek new sources of financing from private equity and venture capital funds. We examine the changes in the availability of bank loans between 2014 and 2016. By considering demand, we estimate the SME loan gap based on Central Bank and publicly available data. Our results show that the loan gap in Brazil is substantial. Finally, we show that the gap grew from 54.29% in 2014 to 87.5% in 2016.

Keywords: Bank loans, Entrepreneurial financing, Interest rate, SME funding

JEL Classification: L21, L26, G32