Who is lending to small and micro family business in China: evidence from CHFS data

• Published in: Small business economics 2024-10, Vol.63 (3), p.1225-1247
• Main Authors: Wu, Shanhui, Dong, Mengyao, Tan, Suhang, Dong, Yan
• Format: Article
• Language: English
• Subjects: Access; Access to credit; Business and Management; Business growth; Commercial banks; Commercial credit; Companies; Corporate profits; Entrepreneurship; Family owned businesses; Finance; Financial services; Financing; Government; Industrial Organization; Interest rates; Lenders; Lines of credit; Loans; Management; Microeconomics; Microfinance; Owners; Policy making; Profitability; Public policy; Research Article; Small business; Small business loans; Trade
• ISSN: 0921-898X; 1573-0913
• DOI: 10.1007/s11187-023-00857-0

This article examines the impacts of traditional and digital finance on the financing of small and micro family businesses (SMFBs) in China. Based on a comprehensive sample of 8625 SMFBs from China Household Financial Survey (CHFS) data, our results from Tobit regressions showed that traditional finance did not reduce the financing constraints of SMFBs, while digital finance significantly promoted SMFBs’ access to credit. Further analyses revealed that additional credit from digital finance helped SMFBs increase their business scale and operational capability, but decreased their profitability due to the high loan cost associated with digital finance. Our findings imply on the one hand that government policies aiming at encouraging commercial banks to provide loans to small and micro enterprises in China have been producing very limited effects. On the other hand, digital finance is an effective micro-loan provider for SMFBs thanks to its strong ability in collecting and integrating individuals’ credit history data, although more measures are needed to take for turning this financing enhancement of SMFBs into their profit growth. These findings enrich the literature on family business by comparing the effectiveness of different financing sources for SMFBs in China. It provides important insights for future policy design on how to ease financial constraints in SMFBs and support the development of SMFBs. Plain English Summary This study investigated the effects of traditional finance and digital finance on the financing of SMFBs in China. Tobit regression results indicated that traditional finance did not alleviate the financing constraints experienced by SMFBs. Despite the use of advanced financial technologies and the encouragement from government policies, commercial banks are still unwilling to extend credit to SMFBs. Digital credit, by contrast, enhanced the financial accessibility for SMFBs. Moreover, increased financing from digital finance was positively associated with SMFBs’ business expansion and operational ability, although it did not enhance the profitability of SMFBs in a short run. To effectively promote the financing and business success for SMFBs, efforts from multiple agents need to be taken. The owners of SMFBS should involve more in-depth in business operation and take greater responsibility for enterprise management. Policymakers should consider commercial banks’ objectives and interests, when encouraging them to lend to small and micro