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REVITALIZING SME & ENTREPRENEURSHIP FINANCING : KEY CHALLENGES AND POLICY IMPLICATIONS.

 

MORE THAN 6 YEARS AFTER THE START OF THE GLOBAL FINANCIAL CRISIS, ACCESS TO FINANCE FOR SMEs AND ENTREPRENEURS REMAINS A MAJOR CONCERN GLOBALLY.

TODAY, START – UPS AND SMALL COMPANIES TO FACE IMPORTANT CHALLENGES IN OBTAINING FINANCE, A KEY INGREDIENT TO THEIR DEVELOPMENT WHILE GOVERNMENTS AROUND THE WORLD STRIVE TO ACHIEVE GROWTH THAT IS SUSTAINABLE AND INCLUSIVE.

THE VULNERABILITY OF THE SME SECTOR TO CHANGING CONDITIONS IN BANK LENDING HAS BECOME MORE EVIDENT AS HAVE THE LIMITATIONS OF TRADITIONAL DEBT FOR NEW, INNOVATIVE AND FAST – GROWING COMPANIES.

THERE IS A PRESSING NEED TO BROADEN THE RANGE OF FINANCIAL INSTRUMENTS AVAILABLE TO SMEs AND ENTREPRENEURS TO IMPROVE THE RESILIENCE OF ECONOMIES AND FOSTER NEW SOURCES OF GROWTH.

FINANCIAL MARKETS WORLDWIDE ARE MORE INTEGRATED AND INTERDEPENDENT THAN EVER BEFORE AND INCREASINGLY COMPLEX AND INTERCONNECTED FINANCIAL MARKETS OFFER OPPORTUNITIES TO SERVE THE NEEDS OF THE SME SECTOR.

TRADITIONAL DEBT INSTRUMENTS INCLUDE BANK LOANS, OVERDRAFTS, CREDIT LINES. THIS TYPE OF FINANCE OFFERS MODERATE RETURNS FOR LENDERS AND IS THEREFORE APPROPRIATE FOR LOW – TO – MODERATE RISK PROFILES.

ALTERNATIVE FINANCING INSTRUMENTS  INCLUDE :

1. ASSET – BASED FINANCE ( ASSET – BASED LENDING, FACTORING, PURCHASE ORDER FINANCE, WAREHOUSE RECEIPTS , LEASING ).

2. ALTERNATIVE DEBT ( CORPORATE BONDS, SECURITISED DEBT, COVERED BONDS, PRIVATE PLACEMENTS, CROWDFUNDING ( DEBT ) ).

3. « HYBRID » INSTRUMENTS ( SUBORDINATED LOANS / BONDS, SILENT , LOANS, PROFIT RIGHTS, CONCERTIBLE BONDS, BONDS WITH WARRANTS, MEZZANINE FINANCE ).

4. EQUITY INSTRUMENTS  ( PRIVATE EQUITY, VENTURE CAPITAL, BUSINESS ANGELS, SPECIALISED PLATFORMS FOR PUBLIC LISTING OF SMEs, CROWDFUNDING ( EQUITY ) ).

 

 

WHILE ASSET – BASED FINANCE IS WIDELY USED INSTRUMENTS TO PROVIDE WORKING CAPITAL TO YOUNG AND SMALL FIRMS ON MORE RAPID AND FLEXIBLE TERMS THAN TRADITIONAL LENDING, THE POTENTIAL OF ALTERNATIVE DEBT INSTRUMENTS IN THE TO FINANCE SME INVESTMENT IS STARTING TO BE RECOGNIZED.

ALSO, SME LOAN SECURITIZATION IS RECEIVING INCREASING ATTENTION AS A WAY TO SUPPORT CAPITALIZATION OF BANKS AND FOSTER SME LENDING.

CROWDFUNDING IS STILL IN THE EARLY STAGES OF DEVELOPMENT AS A SOURCE OF BUSINESS FINANCE, BUT IS EXPECTED TO PLAY AN INCREASINGLY ROLE IN THE FUTURE, AS THIS INSTRUMENT BECOMES MORE REGULATED.

WITH THE SUPPORT OF PUBLIC PROGRAMMES, HYBRID INSTRUMENTS ARE INCREASINGLY AVAILABLE TO LOWER – TIER SMEs.

PRIVATE EQUITY INVETSMENT HAS DEVELOPED SUBSTANTIALLY IN RECENT DECADES, PARTLY OFFSETTING STAGNATION IN PUBLIC MARKETS.

PUBLIC LISTINGS OF SME EQUITY HAVE THE POTENTIAL TO PROVIDE FUNDING FOR INNOVATIVE AND HIGH – GROWTH SMEs, BUT MARKETS ARE CURRENTLY SMALL.

 

THE CHALLENGES TO SME UPTAKE OF ALTERNATIVE FINANCING INSTRUMENTS NEED TO BE ADDRESSED BY  :

1. IMPROVING SME SKILLS AND STRATEGIC VISION FOR THEIR FINANCING NEEDS.

2. DESIGNING EFFECTIVE REGULATION THAT BALANCES FINANCIAL STABILITY AND THE OPENING OF NEW FINANCING CHANNELS FOR SMEs.

3. DEVELOPING INFORMATION INFRASTRUCTURES TO REFLECT MORE ACCURATELY THE LEVEL OF RISK ASSOCIATED WITH SME FINANCING AND ENCOURAGE INVESTORS’ PARTIICIPATION.

4. IMPLEMENTING POLICIES THAT LEVERAGE PRIVATE RESOURCES AND DEVELOP APPROPRIATE RISK – SHARING MECHANISMS WITH THE PRIVATE SECTOR.

5. AND IMPROVING THE EVIDENCE BASE.

 

 

 1. NEW APPROACHES TO SME AND ENTREPRENEURSHIP FINANCING : BROADENING THE RANGE OF INSTRUMENTS ( SYNTHESIS REPORT ).

2. FINANCING SMEs AND ENTREPRENEURS 2015 AN OCDE SCOREBOARD – ISBN 978 – 92 – 64 – 22896 – 2 -

 3. AJEF / OCDE  13 / 04 /2015 – ATELIER SME SCOREBOARD  – CENTRE POUR L’ENTREPRENEURIAT, LES PME & LE DEVELOPPEMENT LOCAL, OCDE -