Basel III is currently on everyone’s lips. Some weeks before the introduction of the first requirements it is still not fully clear how and which parts of it will be implemented. Several studies about the impact of Basel III on bank loan availability for small and medium sized companies (SMEs ) do exist (e.g. McKinsey (2010)) which have shown that the introduction of those new regulatory requirements hamper the access for SMEs to sufficient sources of funding. This raises the question if these restrictions for bank lending can be substituted by some alternative funding source or if the availability of external finance to SMEs will be constrained under Basel III. This seminar paper focuses on the lending alternatives apart from bank loans and the possibility of gathering additional equity capital. This is basically the so called asset based finance. Thereby the paper concentrates on European SMEs as long as their conditions are quite similar to those of Austrian SMEs and the introduction of Basel III can be expected to be most strict for European financial institution and thus may hit those SMEs the most.
Before starting with the explanation of different lending alternatives the importance of SMEs for the global economy should be pointed out. The importance is especially present in Europe. SMEs account for two third of the total employment in the EU-27 area and they generated more economic growth from 2002 to 2008 than large firms did (Oxford Economics, 2011). Moreover they represent 99% of all businesses that exist in Europe (European Commission, 2005). So SMEs are the main driver of economic growth, employment and wealth in Europe. Apart from that each single SME does not have a systematic risk and they were also not responsible for the current financial crisis. Thus SMEs should generally be supported to sustain growth and employment. Nevertheless the rules of Basel III may have highly negative influences on their financing possibilities which moreover has a negative effect on the real economy...
Table of Contents
1. Introduction
2. Lending Alternatives
2.1. Leasing
2.2. Factoring
2.3. SME-Bonds
2.4. Asset-Backed-Securities
3. The Importance of Basel III for Lending Alternatives to SMEs
3.1. A short introduction to Basel III
3.2. How Basel III may influence Leasing and Factoring
3.3. Access of SMEs to Finance
3.4. Riskiness of the Leasing and Factoring Business
4. Conclusion and Prospect for the Leasing and Factoring Business
Research Objectives & Key Topics
This paper examines how the implementation of Basel III regulatory requirements impacts the availability and cost of alternative financing sources—specifically leasing and factoring—for Small and Medium-sized Enterprises (SMEs) in Europe, while evaluating the inherent risk profiles of these instruments.
- The role of SMEs as economic drivers in Europe.
- Mechanisms and benefits of leasing and factoring as bank loan alternatives.
- Analysis of Basel III’s impact on the funding and lending sides of the leasing and factoring industry.
- Investigation into the current financing difficulties faced by European SMEs.
- Evaluation of the riskiness of leasing and factoring to determine capital adequacy requirements.
Excerpt from the Book
2.1. Leasing
Leasing is presented first as the probably most important lending alternative especially for SMEs. The idea behind leasing is very simple. The asset is not bought by a firm directly using its own cash or a bank loan. Instead the asset belongs to a leasing company called Lessor which “lends” the asset to a firm for usage (the lending company is called Lessee) over a certain period of time. The Lessor receives a regularly payment as a compensation (see Brigham and Erhardt, 2005). Many different types of leasing contracts do exist with various specifications. Leasing is mainly differentiated between operating and financial leasing. It is not necessary to list all possible configurations here. Instead the most relevant aspects should be mentioned. The usage of leasing has a positive impact on the balance sheet and thus the rating of a company improves by lowering its leverage ratio in contrast to lending. This is simply because the firm does not increase its debt which it otherwise would do by using a bank loan.
Summary of Chapters
1. Introduction: Outlines the significance of SMEs for the European economy and introduces the research question regarding the impact of Basel III on their access to alternative finance.
2. Lending Alternatives: Provides an overview of various non-bank financing options, focusing primarily on the mechanics, benefits, and usage statistics of leasing, factoring, SME-Bonds, and Asset-Backed-Securities.
3. The Importance of Basel III for Lending Alternatives to SMEs: Analyzes the regulatory changes introduced by Basel III, discusses how these rules impact the refinancing and operational costs of leasing and factoring providers, and examines the risk profiles of these businesses.
4. Conclusion and Prospect for the Leasing and Factoring Business: Summarizes the findings, suggesting that while Basel III may increase costs for alternative financing, these instruments remain essential and potentially resilient for SME growth.
Keywords
Basel III, SMEs, Leasing, Factoring, Bank Loans, Lending Alternatives, Economic Growth, Liquidity, Credit Risk, Capital Adequacy, Financing, Asset-Based Finance, Refinancing, European Economy, Regulatory Requirements
Frequently Asked Questions
What is the primary focus of this paper?
The paper investigates the impact of the Basel III regulatory framework on alternative lending sources, such as leasing and factoring, for small and medium-sized enterprises (SMEs) in Europe.
Which alternative financing methods are analyzed?
The study examines leasing and factoring as primary alternatives, with brief considerations of SME-Bonds and Asset-Backed-Securities.
What is the central research question?
The research explores whether the tighter regulatory requirements of Basel III will constrain the availability of external finance for SMEs or if these alternative sources can effectively substitute for traditional bank loans.
Which scientific methods were employed?
The author utilizes a combination of theoretical analysis, review of existing studies (e.g., McKinsey, Oxford Economics), and empirical insights gained from interviews with financial experts like Martin Wolf.
What topics are covered in the main section?
The main section covers an introduction to Basel III, its specific influence on the funding and lending sides of leasing and factoring businesses, current SME access to finance, and an evaluation of the riskiness of these alternative finance instruments.
Which keywords best describe the work?
Key topics include Basel III, SMEs, Leasing, Factoring, Credit Risk, and Capital Adequacy.
Why are SMEs considered vulnerable under Basel III?
SMEs rely heavily on external financing; if Basel III makes refinancing for leasing and factoring companies more expensive, these costs are likely passed down as higher interest rates, potentially limiting credit access for SMEs.
How does the author evaluate the risk profile of leasing?
Based on Schmit's study, the author argues that leasing is a low-risk business with high recovery rates, suggesting that penalizing these instruments with high capital requirements under Basel III may be inappropriate.
What is the outlook for the factoring industry?
The author sees high growth potential for factoring as SMEs increasingly recognize its benefits for liquidity management and balance sheet optimization, despite current awareness hurdles.
- Quote paper
- BSc Daniel Hosp (Author), 2012, Importance of Basel III for lending alternatives to SMEs, Munich, GRIN Verlag, https://www.grin.com/document/209079
