SMEs play a pivotal role in job creation and wealth generation, and their financial inclusion is crucial to assure their sustainability. This research explores if and how economic performance and financial stability influence lenders in their decisions. It measured economic performance and financial stability by profitability and liquidity ratios. It also explores the role of the audit report. It considers financial statements from 2016 to 2019, focusing on companies in the tourism sector in Portugal. The outcomes provide valuable insights for SMEs managers, helping them to access bank loans at a lower cost. This is crucial for the sustainability of these businesses, mainly considering the severe challenges faced by the tourism sector. These findings align with the United Nations Sustainable Development Goals, particularly Goal 8, which encompasses the objective of improving SMEs' access to financial services. This research demonstrates that both profitability and liquidity impact the cost of debt. The audit report and its content don't seem to influence credit conditions.
TopIntroduction
The small and medium enterprises (SMEs) sustainability hold great importance, given that these businesses play a substantial role in job creation and wealth generation. This topic carries particular significance, as it is acknowledged by the United Nations within its United Nations Sustainable Development Goals (SDGs). Goal 8, which focuses on decent work and economic growth, includes among its objectives the promotion of policies that bolster development, facilitate the creation of quality jobs, foster entrepreneurship, stimulate creativity and innovation, and promote the formalization and expansion of SMEs, including by enhancing their access to financial services. Ensuring that SMEs have adequate access to financing is crucial for enhancing their productivity, a key factor in driving economic growth and employment opportunities.
The predominant business structure in Portugal is comprised of SMEs, and this characteristic extends to the units within the tourism sector as well. In 2019, there were a total of 1,333,649 SMEs, representing a staggering 99.90% of all business entities. Among these, 117,971 were specifically operating within the hotels and restaurants sector (PORDATA, 2021).
In many SMEs, day-to-day operational management primarily revolves around maintaining sufficient liquidity. However, when SMEs require financing for investment projects or trade credit, they typically rely on internal funding sources and seek bank loans. Banks, when considering loan applications from SMEs, scrutinize not only their prospective financial and economic profitability but also their ability to repay the borrowed funds (Andrieu et al., 2018; Canton et al., 2013; Maines & Wahlen, 2006).
As part of the assessment process, financial statements, often accompanied by audit opinions to enhance the reliability of the information, serve as the primary source of data for lenders to evaluate a company's financial well-being (Berry & Robertson, 2006; Schneider, 2018). Additionally, these lenders, particularly those from banking institutions, frequently request supplementary private information from companies, thereby gathering a more comprehensive understanding of their financial health (Ball & Shivakumar, 2005; Minnis, 2011; Minnis & Sutherland, 2017).
In the aftermath of the global COVID-19 pandemic, numerous companies in the tourism sector experienced a significant reduction in their income, all while still contending with their regular fixed expenses. This predicament arose because tourism was one of the industry’s most profoundly impacted by the pandemic. Consequently, many of the surviving companies within this sector will require financing to rejuvenate their operations. Among the prevalent forms of financing, bank loans are frequently sought after. Nevertheless, these loans often come with exorbitant financial costs and stringent conditions imposed by the banks, which are frequently tied to specific financial ratios. These challenging conditions and high financial costs can pose significant hurdles for companies in the tourism sector looking to secure the necessary capital for recovery.
Given this framework, the research intends to make contributions to identify factors arising from the financial information that are interpreted by bank lenders as associated with less risk in the financing, or, in other words, associated with less cost of debt, considering the prediction of reimbursement capacity. The study focuses particularly on what concerns profitability and liquidity as, respectively, measures of performance and cash-flow management. The analysis is on tourism sector SMEs in Portugal.
Assumed that the UN's estimation that international tourism levels may take up to four years to return to pre-2019 levels, coupled with the significant role played by SMEs in the southern European tourism sector, it becomes increasingly crucial to comprehend the challenges that hinder their ability to secure bank loans or obtain favourable conditions that can ensure their sustainability, job retention, and growth (UNWTO World Tourism, 2022).