A growing literature has been examining how firms react to credit constraints by adjusting for this financial burden through a reduction in labor costs. Evidence on the topic shows heterogeneous employment effects depend on a firm’s characteristics and the market where the firm is active. This paper aims to extend the existing limited evidence by investigating whether employment decisions of Belgian SMEs were affected by different types of credit constraints during the European sovereign debt crisis. We exploit detailed Belgian matched bank-firm data and use the variability in banks’ financial health following the 2008 crisis as an exogenous determinant of firms’ access to credit. The results corroborate the hypothesis that credit-constrained SMEs reduced their labor force in the aftermath of the 2008 crisis. Whereas employment effects were quite similar across different types of loan applications, the effects significantly diverged with regards to market demand and competition. SMEs facing negative demand shocks and fierce competition exhibited a higher tendency to reduce their labor force. In addition, this paper identifies the main strategy taken by SMEs to reduce labor costs. Although most firms adjusted via the extensive margin, the results indicate that SMEs were more likely to adjust via the intensive margin due to the temporary layoff scheme introduced by the Belgian government. This finding supports the hypothesis that short-term compensation programmes contribute to employee retention during recessions.