How does government-backed finance affect SMEs' crisis predictors?

Area of Science:

• Economics
• Financial Management
• Public Policy

Background:

• Small and mid-size enterprises (SMEs) are crucial economic drivers but face financial vulnerabilities.
• Public credit guarantee schemes aim to mitigate SME financing risks and support their growth.
• Understanding the precise impact of these guarantees on SME financial health and crisis indicators is vital for effective policy design.

Purpose of the Study:

• To estimate the impact of public guarantees on crisis predictive indicators for SMEs.
• To analyze the short- and medium-term effects of guarantees on SME profitability and financial health.
• To identify factors that amplify the economic and financial effects of government-backed loans.

Main Methods:

• Utilized a confidential database of guarantees from the Italian Central Guarantee Fund.
• Applied difference-in-difference regressions and propensity-score matching estimators.
• Analyzed a sample of approximately 40,000 SMEs over the 2010-2018 period.

Main Results:

• Public guarantees improve SME profitability in both the short and medium term.
• SME financial health initially worsens but shows alleviation of financial burdens two years post-guarantee.
• Effects are amplified for micro-sized firms, service sector companies, and direct guarantees.

Conclusions:

• Public guarantees can effectively enhance SME profitability and alleviate debt overhang.
• Scheme design should consider firm size, sector, and guarantee type for maximum impact.
• These findings support policymakers in designing credit guarantee schemes to prevent SME zombification.