Why non-bank SME lending?

As the Duke of Florence and an ex-banker myself I feel it my duty to write a piece where I delve into non-bank SME lending and explore the scale of the SME funding gap and how at Florence Finance we are striving to address this issue. Buckle up anon.

Small and Medium Enterprises (SMEs) play a major role in most economies, SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development. They represent about 90% of businesses and more than 50% of employment worldwide.

Developing Markets

Formal SMEs contribute up to 40% of GDP in emerging economies. These numbers are significantly higher when informal SMEs are included. The WorldBank [1] estimates, that 600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments around the world. In emerging markets, most formal jobs are generated by SMEs, which create 7 out of 10 jobs. However, access to finance is a key constraint to SME growth, it is the second most cited obstacle facing SMEs to grow their businesses in emerging markets and developing countries.

About half of formal SMEs don’t have access to formal credit. The financing gap is even larger when micro and informal enterprises are taken into account. The International Finance Corporation (IFC) estimates that 65 million firms in developing countries (or 40% of formal micro SMEs) have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of global SMEs & Micro-SME lending.

Developed Nations

Things are somewhat better in the developed world, but the numbers are still staggering.  SMEs represent more than 99% of all European non-financial corporates and employ over 90 million people, accounting for almost 70% of total employment in the EU-28 non-financial sector. They also generate close to 60% of the total gross value added.

Since European SMEs depend on banks for 70% of their external financing (compared to only 40% in the US), any gaps between loan demand and supply can easily lead to lower investment growth, which is a constraint on overall economic growth in the future.

A research paper created by Allianz [2] attempts to estimate the bank loan financing gap for SMEs in the Eurozone as a whole and in the following six major countries: Germany, France, Italy, Spain, the Netherlands, and Belgium using the methodology of Mc Cahery, J., Lopez de Silanes, F., Schoenmaker, D., & Stanisic, D [3]. While the initial paper gives estimates for 2013, Allianz looks into the most recent 2018 data for the Eurozone and compares them with data from 2015, which was when the ECB began its quantitative easing program.

The ECB’s very accommodative monetary policy, which now looks set to continue until at least Q4 2022, has helped the Eurozone reduce its SME financing gap. But country heterogeneity persists.

Figure 1 - Small and medium enterprises (SMEs): share of total companies, employment, and value-added:

Figure 1 - Small and medium enterprises (SMEs): share in total companies, employment and value added

Sources: European Commission, Allianz Research [2]

Let's look at some key points:

  • Although only 3% of GDP in 2019 (down from 6% of GDP in 2015 ), the Small and Medium Enterprise (SME) bank loan financing gap in the Eurozone is still  400 Billion Euros.
  • Remaining higher than the 2% of GDP seen in the US, where corporate financing is much more diversified between bank credit and market financing.
  • This is the result of record low bank loan interest rates and higher loan availability thanks to ECB support which has pushed up loan supply mainly in core countries (Germany, France, Belgium, and the Netherlands), but also higher non-bank financing sources.
  • At the same time, the decline in the financing gap is also linked to a significant downside adjustment in loan demand in Southern European countries, such as Italy and Spain. Delayed recovery in fixed capital formation and an improved self-financing capacity, notably since 2015, partly explain the trend.
  • Country heterogeneity persists. The highest SME bank loan financing gaps are in the Netherlands (22% of GDP), Belgium (14%), France (9%), and Italy (4%). In the first three countries, the gap is essentially linked to the high SME debt stock but also higher economic activity, though the increase in debt has been higher than the increase in activity. In Italy, the gap is mainly explained by the supply constraint.

The Netherlands

Let's take a look at the Netherlands as a case study, as after all this is the place a large portion of the Florence Finance founders call home, including myself. The Netherlands has a relatively concentrated local banking sector that has limited competition from international players when it comes to SME financing.  According to a recent report by the Dutch SME financing foundation based on Dutch central bank data [4] we can see the following:

  • New small corporate financings  (< 250k) totaled approximately €4,6 bn in 2020 and this number declined by 11,5% to € 4,1 bn in 2021 which comprised of 41% non-bank financing and only 59% bank financing.
  • New medium-sized corporate financings  (between 250k-1m in size) totaled approximately €6,9 bn in 2021 and grew relative to 2020 number of €6,8 bn. In 2021 only 11,5% of these financings came from non-banks, the balance being entirely bank financed.
  • Larger corporate financings  (< 1m ) totaled approximately €101 bn in 2020 and this number increased by 28% to € 130 bn in 2021, the vast majority of which is funded by banks and less than 1% of non-bank financing.

The picture that emerges from the above data is clear, smaller businesses are harder hit in economically volatile times as credit flows stall. What is also clear is that banks focus predominantly on the larger end of the credit spectrum and alternative sources of non-bank funding can add meaningfully to the funding spectrum of existing non-bank SME lenders.


The addressable market for SME funding is huge and the relative impact of additional funding is probably larger in developing nations than in developed nations. That being said, the smaller the SME the higher the dependence on non-bank funding (also in the developed world), and nowhere is this more prevalent than in the Netherlands (as per the data above). This is precisely why we at Florence Finance chose to start here, on our home turf. Once we build a successful crypto SME funding alternative in the Netherlands, we will look to broaden that geographically over time but likely stick to developed nations before venturing into emerging markets as we see that as a very different skill set/environment.


1) WordBank: https://www.worldbank.org/en/topic/smefinance (2022)

2) ALLIANZ: European SMEs: Filling the bank financing gap (2019)

3) Mc Cahery, J., Lopez de Silanes, F., Schoenmaker, D., & Stanisic, D . (2015) “The European Capital Markets Study: Estimating the Financing Gaps of SMEs”

4) Stichting MKB financiering - Onderzoek non-bankaire financiering 2021