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The ECB just published the Survey on the Access to Finance of Small and Medium-sized Enterprises (SMEs) in the euro area for the period March-September 2010 – from now on 1H 2010. The survey reveals that, with respect to the second half of 2009, the overall financial situation of SMEs has generally improved, with a good increase in turnover and a smaller deterioration in the profit situation, with a net 21% of SMEs reporting a reduction in profits (vs. 33% in 2H 2009). The survey provides also a confirmation of on ongoing deleveraging process in the corporate sector, with a larger number of firms reporting a reduction in their financial leverage (expressed in terms of debt-to-assets ratio).

The lack of demand (identified by “finding customers”) remains the most pressing problem for SMEs also in 1H 2010 with 28% of respondents, like in 2H 2009. The lack of competition and access to finance rank second and third – for the latter, the percentage declined from 19% in 2H 2009 to 15%. It is interesting to note that the “availability of skilled staff or experienced managers” became a pressing problem for 13% of respondents among SMEs (vs. 9% in the previous two releases). Moreover, for large firms, this factor currently ranks third (from fifth in 2H 2009), after the lack of demand and competition, and before the access to finance (with “only” 11% of respondents).

In 1H 2010, SMEs increased their recourse to external financing with respect to 2009, possibly to meet the needs related to a recovery in economic activity. In particular, SMEs largely relied on overdrafts and credit lines (40% vs. 35% in 2H 2009) and increased the use of trade credit (from 30% to 34%), while bank loans recorded a tiny decline (34% vs. 35%). In a similar direction, the net balance (i.e. increase – decrease) of SMEs reporting an increase in their need for bank financing fell from 16% to 3%. This softening is perfectly in line with the trough in the credit cycle for corporates observed in the first months of 2010, with a marked contraction of corporate loans, following the slowdown in economic activity in the previous year. The overall picture on the factors behind the increase of external financing needs remained broadly unchanged: for SMEs they were fixed investment, inventories and working capital, together with lower availability of internal funds.

Finally, coming to the access to finance, the percentage of SMEs reporting an improvement in the access to bank loans was still lower than that reporting a worsening. However, the net balance (deteriorated – improved) decreased substantially to 12% from 32% in the second half of 2009. In contrast, the assessment was positive for large firms, with the net balance (deteriorated – improved) rising from 28% to -8%. We detect an improvement in all factors affecting availability of the external financing for SMEs, with the general economic outlook being the most important one, followed by the firms-specific outlook, and the supply of credit (the percentage of SMEs reporting less worsening in the willingness of banks to provide loans was 16% vs. the previous 25%).

Other very interesting results come from the four major countries in the euro area, confirming some differences along the economic recovery path. In particular, a large dichotomy was reported for firms’ turnover: the net percentage of SMEs showing an increase in turnover was equal to 30% and 19% in Germany and France, respectively, while in Italy the balance remained negative at -6% (although improving vs. -33% in 2H 2009). The net percentage of SMEs reporting a turnover deterioration remained particularly high in Spain (at 39% vs. 52% in 2H 2009). Germany was the only country exhibiting a net increase in profits. In contrast, net profits continued to decline mostly in Italy and Spain, with the net percentage reporting a decrease equal to 36% and 54%, respectively.

For what concerns the availability of bank loans to SMEs in the euro area as a whole, in 1H 2010 it worsened less sharply than in 2009 (with 12% of respondents reporting a decrease vs. 32% in 2H 2009). The improvement is fairly evenly distributed across countries, with French firms reporting a very slight deterioration in bank loans availability (around 1%), followed by Italian and German firms (at 6% and 8% of respondents). Spain ranked fourth, but kept improving with the percentage of SMEs reporting a decline in the availability of bank loans decreasing from 48% to 16%.

Bottom line: The survey provides further evidence that goes in the direction of ongoing improvement in the financial situation of SMEs, in terms of turnover, profits and debt. Firms increased also their recourse to external financing, and this represents a positive sign for the economic recovery. The need for bank loans diminished somewhat, with firms favoring overdrafts and trade credit. In contrast, the access to bank loans showed some improvement, although among SMEs the percentage of firms reporting a worsening in the availability of credit was still higher than that reporting an improvement. The opposite was true for large firms. Finally, among countries, the survey confirmed a more solid income position for German and French firms with respect to Italian and Spanish ones, with the first two showing a significant improvement in their profit situation. It is clear that this is essential to support a sustainable investment recovery.

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