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The impact of late payments on SMEs’ access to finance: Evidence from credit rationing and loan terms

Year: 2024

Type: article

Abstract: Late payments represent a significant threat to the financial resilience of European SMEs , with wide-reaching implications. While existing literature highlights the detrimental impact of late payments on SME liquidity and insolvency risk, the specific effects on credit availability and loan terms remain underexplored. Using unique firm-level data from 11 European countries over the period 2019–2023, we examine how late payments impact SMEs’ access to finance . We document that SMEs experiencing frequent or occasional late payments face difficulties in accessing finance. The primary mechanism is credit rationing , as banks potentially view cash flow uncertainty as an increased risk, prompting them to restrict lending. The increased risks perceived by banks translate into less favorable loan conditions for SMEs facing late payments, such as higher interest rates and smaller loan amounts. These findings highlight the importance of strengthening and enforcing the Late Payments Directive to address the persistent issue of late payments.

Source: Economic Modelling

DOI: 10.1016/j.econmod.2024.106896

Author: Orcun Kaya

Institution: ZHAW Zurich University of Applied Sciences

Language: English

Topic: Working Capital and Financial Performance

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

SDG: Decent work and economic growth

Open Access status: hybrid

Estimated APC paid: $3,140