Credit offers to small and medium-size businesses: an overview of considerations that influence the decision process of an active lender with regard to commercial loans and trade credit.

Commercial loans and trade credit are necessary to allow companies to go beyond the limitations of the reinvestment of earnings and to avoid financing by issuing stock. Their importance can be illustrated by the fact that in 1993, nearly half (49.63 percent) of the assets of U.S. small and medium enterprises (SMEs) were financed by debt. (1) More specifically, commercial loans from financial institutions and trade credit from suppliers accounted for 26.66 percent and 15.78 percent of SMEs' assets, respectively. From a Canadian standpoint, a study conducted by St-Pierre et al. (2) among more than 2,000 SMEs shows that 45 percent applied for a credit margin and 28 percent applied for medium or long-term financing in the three years that preceded this study.

Loan Offers by Financial Institutions

Concerned with maximizing their profit, financial institutions target their development on the most profitable sectors. According to this premise, bank loan offers to SMEs are motivated by the attractiveness of the business segment. Schwarz (3) states that small and medium businesses generate a 21-percent and 15-percent return on invested capital (ROIC), respectively, compared to a ROIC of only seven percent for large businesses.

A number of characteristics of the financial institution can influence its loan offer, including the following:

* Competitive environment

* Size of the lender and technology used

* Financial situation of the lender