Article at a glance:

Cláudia Custódio’s study examined an ongoing Portuguese plan to help healthy small businesses during the 2008 economic crisis and the decade that followed. Key findings include:

• Targeted credit guarantees can be a powerful tool to preserve jobs, sustain investment and strengthen productivity. This is successful only when deployed selectively and at moments of genuine financial stress. There were no discernible benefits during times of growth.

• Well-designed schemes support viable firms, rather than propping up unproductive ones.

• Banks and business leaders play a critical role in ensuring support reaches firms that can use it productively

Small businesses are the backbone of most national economies, accounting for 90 per cent of businesses worldwide (World Bank) and 99 per cent of UK businesses. And there are many government initiatives to help them - but some schemes risk propping up inefficient and failing ventures.

Our research examined an ongoing Portuguese plan to help healthy small businesses during the economic crisis of 2008 and into the decade that followed. By using state of the art research methods, the results showed without doubt the positive impacts – and when support was no longer effective.

Amid a worldwide credit squeeze in the wake of the downturn, the Portuguese government offered these firms access to cheaper, largely guaranteed bank loans – thereby removing most of the risk for banks. Their eligibility was decided based on annual reviews and criteria such as sound finances and performance.

The study looked at a decade’s worth of data which ran beyond the recession and the subsequent sovereign debt crisis in the Eurozone and on into years of economic expansion. And the results are clear. In times of economic crises, small businesses which benefitted from cheaper guaranteed credit tended to invest more, recruit more staff and were more likely to become exporters. During this time the scheme boosted growth and appeared to improve productivity.

But importantly, cheaper guaranteed credit only had an impact during economic downtimes – there were no discernible benefits during times of growth.

What can policy makers take from these findings? 

• Targeted finance works with a few caveats: schemes to ease access to cheaper finance are highly effective if disbursed with discretion. While small businesses account for nearly two thirds of jobs in the UK’s private sector, it’s unproven that blanket support – such as the loans and furlough schemes extended in the UK during the Covid 19 pandemic – will produce the same results. These schemes must be precisely designed, targeted and reviewed.  

• Blanket support is not proven to deliver the same benefits over different business cycles: findings suggest targeted loan guarantees are ineffective during good times – it’s only during recessions that these small businesses benefit from a credit boost. 

• Eligibility criteria differ for different economies: these targeted firms are probably among those who benefit from smoothly functioning capital markets during good times and don’t need government support – possibly an indication that the threshold for eligible firms in Portugal was set too high during the expansion period. Given the UK’s concerns over lacklustre productivity, it’s promising that we see mild benefits from this targeted support – eligible companies became more productive, although these effects took time to emerge.  

• Narrowed gaps between levels of productivity across industries: – according to economic models, these findings reflected that capital is better allocated among businesses, possibly allowing companies to improve their productivity. 

• Employment effects are mixed: while there was a net uptick in job numbers, we also deduced that companies investing seemed also to lose some roles. Could it be that companies buying new equipment might be hiring new staff to operate it? Departing employees remained unemployed – an impact that policy makers will certainly care about.  

What can banks and small businesses do? 

This was a tightly targeted programme which removed much, but not all, of the risk for banks themselves. We discovered that many small businesses didn’t know about the support on offer and that take up was low in the early stages. Could banks act as important go-betweens to communicate available schemes to relevant small businesses?  

Small business leaders reported that the bureaucracy involved in applying for a loan was too arduous – but our research shows that it’s worth the effort. Companies who benefitted were those judged to be in good financial health, without too much debt or too many unpaid bills – it pays to keep your house in order. 

Targeted credit guarantees can be a powerful tool to preserve jobs, sustain investment and strengthen productivity. The Business School’s research suggests this is successful only when deployed selectively and at moments of genuine financial stress.