Are Small Businesses Worthy of Financial Aid? Evidence from a French Targeted Credit Program*

We ask whether public financial aid reduces small businesses' credit constraints. To answer the question, we analyze a policy of bank loans made from subsidized funds. Extensions of this large program are plausibly exogenous and help identify its effects. Using firm-level data, we find that the program substantially increases debt financing without substitution between subsidized and unsubsidized finance. Returns on subsidized debt are significantly above its market cost, with no subsequent surge in default risk. We interpret this as evidence that targeted firms are credit-constrained and underline the implied welfare differences between upfront financial aid and public guarantees.