Journal of Corporate Finance 27 (2014) 173-193 ELSEVIER Contents lists available at ScienceDirect Journal of Corporate Finance Journal of CORPORATE FINANCE ----- journal homepage: www.elsevier.com/locate/jcorpfin Bank lending constraints, trade credit and alternative financing during the financial crisis: Evidence from European SMEs CrossMark Eddie Casey a,1, Conor M. O'Toole b,c a Irish Fiscal Advisory Council, Whitaker Square, Sir John Rogersons' Quay, Dublin 2, Ireland b Economic Analysis Division, Economic and Social Research Institute, Whitaker Square, Sir John Rogersons' Quay, Dublin 2, Ireland · Department of Economics, University of Dublin, Trinity College, College Green, Dublin 2, Ireland ARTICLE INFO Article history: Received 8 November 2013 Received in revised form 1 May 2014 Accepted 2 May 2014 Available online 10 May 2014 JEL classification: G32 D22 Keywords: Financial crisis Credit constraints Bank lending Trade credit 1. Introduction and background ABSTRACT Using euro area firm-level data since the recent financial crisis, we test whether bank lending constrained small- and medium-sized enterprises (SMEs) are more likely to use or apply for alternative external finance including trade credit, informal lending, loans from other companies, market financing (issued debt or equity) and state grants. Our constraint indicators identify both credit-rationed firms and firms that self-ration due to high lending costs. We find that credit- rationed firms are more likely to use, and apply for, trade credit. This increases with firm size and age. We also find that constrained firms are more likely to use informal lending or loans from other companies but find no evidence that bank-constrained SMEs apply for, or use, market finance. Smaller, self-rationing borrowers are more likely to apply for grant finance. Finally, we find that firms denied credit for working capital tend to turn to trade credit, while informal and inter- company lending tends to act as a substitute for bank investment loans. c 2014 Elsevier B.V. All rights reserved. The nature of the recent financial crisis in Europe has brought to the fore concerns regarding firms' capacity to access traditional bank lending. This issue has been well documented in the case of small- and medium-sized enterprises (SMEs). 2 Against this backdrop, a number of papers have focused on testing the determinants and effects of bank lending constraints on firms since the onset of the crisis (see for example, Popov and Udell, 2012; Jimenez et al., 2012; Campello et al., 2010; Artola and Genre, 2011; Ferrando and Griesshaber, 2011). However, less research has been undertaken on the relationship between bank lending and alternative sources of finance. In this paper, we test whether bank lending constraints in times of crisis increase firm demand for alternative forms of external finance. We use firm-level data on SME access to finance from the ECB/EC survey on access to finance for small- and medium-sized enterprises (SAFE) covering a key part of the financial crisis period between 2009 and 2011 across 11 euro area members. We make the following contributions. First, we determine whether bank lending constrained SMEs are more likely to: 1) be end-users of trade credit, informal