The non-bank lending channel: an important substitute for SME bank debt

Purpose: Post-global financial crisis (GFC), contraction in bank lending to small and medium-sized enterprises (SMEs) created a market opportunity for non-bank lenders. Despite the consequential global growth of SME non-bank debt, little is known about the characteristics of firms that use non-bank debt. Using a database on access to finance in the post GFC period, this paper identifies the characteristics of SMEs that apply for and use non-bank debt. Design/methodology/approach: The non-bank debt lending of 1,683 Irish SMEs post GFC is described. A probit model is estimated to characterise firms that obtained non-bank debt using a three-stage modelling procedure, corrected for selection biases based on firm decisions to apply for bank debt and/or alternative finance. Findings: Non-bank debt is found to be a substitute for bank debt and is used by bank-rejected, bank-discouraged, self-discouraged and very young firms. This suggests some market segmentation with non-bank lending reducing SME funding gaps. Inconsistent with the financial intermediation literature, findings may reflect increased bank regulation and rationalisation. Practical implications: Non-bank debt is an important source of finance for bank-rejected and discouraged borrowers. Given this structural change in SME lending, it is important to understand the nature of, and any risks associated with, the non-bank debt sector. Originality/value: This study uniquely considers all sources of non-bank debt. It builds on other studies to consider the impact of both bank and self-discouragement on the use of non-bank debt.