The funding landscape for small and medium-sized enterprises (SME) and mid-caps will continue to evolve in 2016, says Moody's Investors Service in the new issue. Bank funding is improving in key markets such as Spain and the use of marketplace lending platforms should expand in Europe.
"The joint surge in bank funding and alternative mechanisms means SMEs and mid-cap firms will continue to benefit from an increasing diversity of funding options, albeit at different costs depending on their size and risk," states Ariel Weil, a Vice President at Moody's.
Moody's says marketplace lending platforms will continue to evolve, providing new financing options to SMEs and other asset classes. In Europe, low interest rates are helping marketplace lenders bring in capital to expand, providing new financing alternatives to both consumers and small businesses. However, a sluggish economy in much of the region could constrain the credit quality of marketplace loans.
In Spain, stronger SME lending will boost profits, but may weaken underwriting standards. Banks have launched a renewed lending drive to the relatively high yielding SME sector in an effort to boost their profitability, as the low interest rate environment continues to weigh on earnings. However, increasingly tight competition for SME business will likely prompt financial institutions to loosen their underwriting standards and misprice risk.
Moody's expects bank lending to remain the preferred source of financing for German SMEs, as terms and conditions for new loans or credit lines to corporates have become more favorable. For these firms, the gap between the borrowing cost of bank lending and bond coupons remains wide.
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