SMEs and entrepreneurs need to diversify their funding amid continued credit constraints said OECD
Small and medium-sized enterprises (SMEs) are fundamental for inclusive growth and jobs, but they need to broaden their sources of finance in order to reduce their vulnerability to volatile credit market developments, according to two new OECD reports.
Both studies – Financing SMEs and Entrepreneurs 2015: An OECD Scoreboard and new approaches to SME and entrepreneurship financing: Broadening the range of instruments underline that alternative funding options must be developed and promoted to support investment. The reports are presented to G20 Finance Ministers in Washington to present policy strategies for SMEs which are key priorities of Turkey’s G20 Presidency.
During a presentation of both reports with the Turkish Deputy Prime Minister Ali Babacan on the margins of the IMF and World Bank meetings in Washington D.C, OECD secretary-general Angel Gurría said: “Small and medium-sized enterprises play a vital role in driving economic growth and creating jobs, but access to finance for these firms will remain a challenge for years to come. There is a pressing need to enable small businesses to diversify their funding sources by tapping alternative finance instruments.”
Financing SMEs and Entrepreneurs 2015: An OECD Scoreboard, said bank lending to SMEs has still not recovered to pre-crisis levels in many countries, putting the brakes on business growth and investment. Although credit conditions have generally eased, they remain tight, especially for SMEs.
Some alternative instruments such as crowdfunding and factoring are gaining traction but venture capital investment and leasing have yet to recover to 2007 levels in most countries. The OECD warns that high levels of non-performing loans among SMEs have a negative effect on banks’ willingness to lend and pose a particular threat to economic recovery in the countries most affected by the financial crisis.
However, payment delays and bankruptcies among SMEs were no longer on the rise in 2013. Bankruptcies remained on average at their 2012 levels while payment delays fell in a majority of the 34 countries surveyed in the Scoreboard.
Financing SMEs and Entrepreneurs 2015: An OECD Scoreboard is an annual report that analyses indicators on SME finance, complemented by demand-side information and an overview of the latest public and private initiatives. It provides a comprehensive source of information on the state of SME finance.
New approaches to SME and entrepreneurship financing: Broadening the range of instruments highlights the fact that traditional bank finance poses challenges to SMEs, in particular to newer, innovative and fast-growing firms with a higher risk profile. The same applies to companies in transition such as those going through a change of ownership or control.
The report considers that diversified funding sources for SMEs can better serve the needs of firms at different stages of their life cycle, as well as help to mitigate systemic risk, strengthen the economy’s resilience to critical shocks and foster new sources of growth.
It maps the main features of a broad range of external financing techniques acting as alternatives to straight debt, including asset-based finance, alternative debt, hybrid instruments, and equity instruments.
The report indicates that it is now essential to address the obstacles that are limiting SMEs’ use of a broader range of financial instruments by:
– Addressing the SME skills gap in finance;
– Designing regulation that balances financial stability, investor protection and the development of innovative financing channels for SMEs;
– Creating information infrastructures to improve credit risk assessment; and
– Increasing participation of private actors in SME finance.
