Bank credit is the predominant source of funding for small and medium businesses (SMEs) in Israel. Access to credit has become one of the most substantial barriers to business growth in the eyes of SMEs. An objective analysis of the extent and terms of credit for small businesses also indicates a significant failure to provide them access to credit. Given these circumstances, for several years now, the government has been trying to find tools to increase SMEs' access to credit and assist them in overcoming the existing market failure.
Among its many efforts over the last decade to provide solutions for SMEs, the government has operated a state guaranteed loan fund. While state guaranteed loans are a common tool in many other countries, in order to address the SMEs’ needs adequately, it is necessary to ensure that the extent of credit will be sufficient and that it will serve the right audience to truly increase the access to credit, rather than act as a substitute for whatever credit is already being provided by the banks.
With the goal of identifying tools that adequately meet the challenge of providing credit to SMEs, ADALYA conducted a methodical analysis of the funds operated by the state. The analysis included a review of existing literature, in-depth interviews and a survey of businesses that received or were declined credit by the fund. ADALYA also performed an international comparison of state guaranteed credit volumes in different countries as a percentage of their GDP.
In light of the findings, a new procedure for operating the fund was developed and the criteria for businesses entitled to receive state funding were established. The project resulted in the formation of a new state guaranteed fund that provides significantly higher credit volumes and addresses SMEs' need for liquidity.