Determinants and Consequences of Bank Borrowings of Small Businesses: Is the COVID-19 crisis special?

We investigate what types of small businesses use bank loans during crisis periods, focusing on the global financial crisis (GFC) and the economic crisis caused by the coronavirus pandemic (COVID-19 crisis). Using comprehensive data on small businesses in Japan, we obtain the following results. First, during these two crisis periods, small businesses with low cash flow, high credit risk, and low sales growth borrowed more from banks. Second, these firms borrowed more during the COVID-19 crisis than during the GFC. Furthermore, ex post profitability of these firms was lower during the COVID-19 crisis, which was special in that vulnerable firms borrowed more from banks. Third, the increases in probability of default were not large during the early stages of the COVID-19 crisis but were economically significant in 2021. These results imply that massive financial support during the COVID-19 crisis delayed firm defaults.