Evidence review (PDF) published in June 2016.
Access to finance programmes can help firms secure funding, but the impacts on firm performance are less clear.
What is access to finance?
Access to finance refers to public programmes that provide or facilitate financing for firms where the market is failing to do so. It includes loans, government subsidised loans for firms, financial education or information to firms, and facilitation of alternative forms of lending by creating networks or matchmaking lenders and firms (for example, business angel interventions, micro-finance, venture capital and group lending).
The rationale: How does access to finance deliver growth?
Access to finance aims to promote firm growth, productivity and employment.
While many firms can obtain the finance they need, there are market failures affecting the supply of both debt and equity finance to certain types of firms (for example, start-ups, and small and medium sized enterprises). This leads to some potentially viable firms being refused finance, which may impact wider economic growth.
These market failures mainly relate to imperfect or asymmetric information. When future profitability is hard to predict, even highly informed lenders may find difficult to distinguish between good and bad projects. Financial markets also typically disregard social returns, only funding projects with the highest private returns and rejecting projects with positive spill-over effects that can benefit society.
Some entrepreneurs and businesses may not fully understand the potential benefits to their business of raising finance or their likely chance of success in gaining finance, which ultimately means they do not apply, limiting the growth of their businesses. Business owners can also lack knowledge of funding sources available or lack the skills to present themselves as strong opportunities to investors.
Evidence review: What does the evidence say about access to finance?
Our evidence review considered 1,450 policy evaluations and evidence reviews from the UK and other OECD countries. It found 27 impact evaluations that met our minimum standards.
What the evidence showed:
- Access to finance programmes have a positive impact on at least one firm outcome (e.g. credit, employment, sales) in 17 out of 27 evaluations.
- Programmes have a positive effect on firm access to debt finance either in terms of the availability of credit or the cost of borrowing (or both). The impact on access to equity finance is mixed (and available evidence limited).
- The impact of policies on investment and assets is mixed.
- There is some evidence that loan guarantees may increase default risk.
- Access to finance had a positive impact on at least one aspect of firm performance (e.g. employment and sales) in 14 out of 17 evaluations.
- However, these overall patterns hide much more mixed results for specific aspects of firm performance, with only half the evaluations typically recording a positive effect when looking at a specific aspect of firm performance (e.g. employment).
Where the evidence was inconclusive:
- There is no evidence that programmes targeted at small and medium-sized enterprises are more or less effective than non-targeted programmes. Other targeted programmes (taken as a group) appear to perform slightly less well.
- The overall results for loan guarantees and alternative investment mechanisms are broadly similar. Loan guarantee schemes introduced in response to economic crisis perform somewhat worse than long term development schemes.
- The overall results for public, private or hybrid programmes are broadly similar.
Where there was lack of evidence:
- We found very few studies that look at the impact of schemes on both access to finance (direct effect of the scheme) and on the subsequent performance of firms (indirect effects of the scheme).
- While most programmes appear to improve access to finance, there is much weaker evidence that this leads to improved firm performance. This makes it much harder to assess whether access to finance interventions really improve the wider economic outcomes (e.g. productivity, employment) that policymakers care about.
- As with other reviews, we found very few studies that gathered (or had access to) information on scheme costs. As a result, we have very little evidence on the value for money of different interventions.
- Most access to finance programmes do appear to improve access to finance. However, the evidence is weak that this in turn leads to improved firm performance. It is therefore hard to assess whether access to finance interventions improve the wider economic outcomes (such as productivity and employment) that policymakers care about.
- More research is needed to provide guidance on how to improve policy effectiveness, or ‘what works better’ in terms of policy design.
- The current research suggests that direct programme outputs (such as loans made or guaranteed) are unlikely to be good indicators of programme impact on wider economic growth.
- Better evaluations should be undertaken to understand the relationship between these programmes and local economic growth, and around the value for money of different approaches.
Case studies: Advice on how to evaluate access to finance
One factor that makes evaluating access to finance policies difficult is that the rationale for intervention is often complex or unclear. If the government programme is mainly addressing problems arising from incomplete information, the benefits should show up at the firm level. These firm level benefits are the focus of most evaluations that tend to consider outcomes such as access to finance, firm survival rate, and firm employment and wages. It is possible, however, that programmes aimed at maximising social returns might deliver benefits at the wider national or area level. If that is the case, this focus on firm effects understates the wider impact.
To help improve evaluation of access to finance interventions, we have three case studies that give examples of how previous policies have been evaluated.
Each evaluation case study has met our minimum standard of evidence, which means it (at a minimum) compares what changed for the organisations or individuals that benefited from an intervention with what changed over the same time frame for otherwise comparable organisations or individuals that didn’t benefit, or that received a different type of intervention. The case studies use two different approaches to achieving this comparison. One study uses a randomised control trial, the gold standard of evaluation, and the others use statistical approaches to try to ‘strip out’ the impact of the other factors that could have affected outcomes in both the beneficiary group and the comparator group.
Read more about how to evaluate, and why we think it can be helpful to learn from previous approaches in our how to evaluate guide . You can also read more about different evaluation methods in our scoring guide and about how we rank evaluations using the Scientific Maryland Scale.