The impact of late payments on SMEs’ access to finance: Evidence from credit rationing and loan terms

Late payments represent a significant threat to the financial resilience of European SMEs, with wide-reaching implications. While existing literature highlights the detrimental impact of late payments on SME liquidity and insolvency risk, the specific effects on credit availability and loan terms remain underexplored. Using unique firm-level data from 11 European countries over the period 2019–2023, we examine how late payments impact SMEs’ access to finance. We document that SMEs experiencing frequent or occasional late payments face difficulties in accessing finance. The primary mechanism is credit rationing, as banks potentially view cash flow uncertainty as an increased risk, prompting them to restrict lending. The increased risks perceived by banks translate into less favorable loan conditions for SMEs facing late payments, such as higher interest rates and smaller loan amounts. These findings highlight the importance of strengthening and enforcing the Late Payments Directive to address the persistent issue of late payments. • We analyzed late payments to SMEs across 11 European countries. • SMEs experiencing frequent or occasional late payments face access to finance challenges. • Cash flow uncertainty undermines SME creditworthiness and restricts lending. • Banks offer less favorable loan conditions to SMEs facing late payments. • Strengthening the Late Payments Directive is key to reducing payment delays.