SME Finance and Economic Empowerment for All

Access to finance is a major obstacle for SMEs, with over 70% of small businesses in developing countries lacking access to formal financial services.

In the United States, the Small Business Administration (SBA) provides financial assistance to small businesses through various loan programs.

Microfinance institutions have been instrumental in providing financial services to underserved communities, with the Grameen Bank in Bangladesh providing loans to over 8.5 million borrowers.

The average loan size from microfinance institutions is around $500, with a repayment rate of over 95%.

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Governments should assess the extent to which SMEs' financing needs are met and where gaps exist, in cooperation with relevant stakeholders, including central banks and financial supervisory authorities.

A strong evidence base and a better understanding of SME financing needs and challenges by public authorities and financial suppliers are crucial for effective policy design.

To improve banks' capacity to lend to SMEs, measures may include credit guarantees, securitization, credit insurance, and adequate provisioning for loan losses.

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Risk mitigation measures should be strengthened, making use of new technologies and mechanisms for underwriting risk, and effective and predictable insolvency regimes should ensure creditor rights while supporting healthy companies.

Financial inclusion is an important tool to reduce informality, and national financial inclusion strategies should include reviewing the legal and regulatory framework of the financial sector.

Policy makers and regulatory authorities should ensure that regulation is designed and implemented that facilitates SMEs' access to a broad range of financing instruments without compromising financial stability and investor protection.

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To improve SME finance, it's essential to identify the financing needs and gaps of small and medium-sized enterprises. Governments should assess the extent to which SMEs' financing needs are met and where gaps exist, in cooperation with relevant stakeholders.

Improving statistical information on SME financing is crucial, particularly in developing economies where a lack of reliable evidence constrains policy design, implementation, and assessment. Central banks, financial supervisory authorities, financial and research institutions, and SME representatives should all be involved in this effort.

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Cooperation at the national and international levels is necessary to increase transparency regarding definitions, improve the comparability of data and indicators, and facilitate international benchmarking and regulatory coordination. This can be achieved through an expansion of the OECD Scoreboard on Financing SMEs and Entrepreneurs.

A strong evidence base is necessary for public authorities and financial suppliers to understand SME financing needs and challenges. This will enable them to make informed decisions and design effective policies to support SMEs.

By improving the evidence base, governments can better understand the financing gaps and issues faced by SMEs and develop targeted policies to address them. This will ultimately contribute to the growth and development of SMEs.

Publicly supported SME finance instruments should adopt principles of risk sharing to leverage private resources and competencies. This is crucial to enhance the resilience of SME financing in the face of rapid economic and regulatory change.

Private investors should be encouraged to participate in SME financing, and risk-sharing and mitigating mechanisms should be developed with them. This ensures the proper functioning of public measures and efficient allocation of government resources.

Policies should be designed to avoid "moral hazard", where excessive risk-taking occurs against the public interest, and potential crowding-out effects. This means ensuring that public schemes do not inadvertently discourage private investment in SMEs.

Multilateral development banks, national development banks, and other public funds should promote SME financing, both directly and indirectly. This can help catalyze and leverage the provision of private resources, especially in risk capital markets.

Traditional financing can be a challenge for SMEs, but there are ways to improve access to traditional bank financing. Banks should strengthen their capacity to lend to SMEs by offering credit guarantees, securitization, credit insurance, and adequate provisioning for loan losses.

Risk mitigation measures should be implemented, utilizing new technologies and mechanisms for underwriting risk. This can help make SMEs more attractive to investors. Effective and predictable insolvency regimes should also be in place, ensuring creditor rights while supporting healthy companies.

SMEs should be allowed to use a broader set of assets, such as movable assets, to secure loans. This can be particularly helpful for knowledge-based companies. However, policy makers must carefully consider the potential risks of expanding the use of intangibles as collateral.

Traditional bank financing is a crucial source of external finance for most small businesses, but it can be challenging for them to access. To strengthen SME access to traditional bank financing, efforts should be pursued to improve banks' capacity to lend to SMEs.

Measures may include credit guarantees, securitization, credit insurance, and adequate provisioning for loan losses. Risk mitigation measures should be strengthened, making use of new technologies and mechanisms for underwriting risk.

Effective and predictable insolvency regimes should ensure creditor rights while supporting healthy companies and offering a second chance for honest entrepreneurs. SMEs should be afforded credit on reasonable terms and with appropriate consumer protection measures in place.

Policy makers should consider enabling SMEs to use a broader set of assets beyond fixed collateral, such as movable assets, to secure loans. The feasibility of expanding the use of intangibles as collateral should be carefully considered, to ease access to lending particularly by knowledge-based companies, while taking into account potential risks.

The use of credit information should also be enabled to improve risk management for lenders and access for borrowers. This can help to reduce the uncertainty and risk associated with lending to SMEs.

Here are some ways to improve SME access to traditional bank financing:

By implementing these measures, SMEs can have better access to traditional bank financing, which can help them to grow and expand their businesses.

Encouraging timely payments in commercial transactions and public procurement can have a significant impact on small business suppliers. SMEs are particularly vulnerable to late payments or non-payment, which can severely affect their cash flow.

Policy makers and regulators should ensure that SMEs are offered clear and appropriate payment terms. This can help prevent disputes and misunderstandings that may arise from unclear payment terms.

Norms can be designed, implemented, and enforced to discourage late payments in commercial transactions. This can include setting clear payment deadlines and consequences for non-payment.

Timely payments in Business to Business (B2B) and Government to Business (G2B) transactions can enhance the cash flow of small business suppliers. By promoting timely payments, businesses can avoid financial difficulties and focus on their core operations.

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Access to a broad range of financing instruments is desirable for SMEs to obtain the form and volume of financing best suited to their specific needs and stage of the firm life-cycle.

To achieve this, multiple and competing sources of finance for SMEs should be supported, and efforts should be made to increase entrepreneurs' awareness of the available financing options through targeted outreach initiatives.

Alternative financial instruments for SMEs should aim to attract a wider range of investors, including institutional investors, and enhance their understanding of SME markets.

Asset-based finance could be fostered to enable young and small firms to access working capital on rapid and flexible terms.

Supply chain and trade finance should be supported to help SMEs integrate in global value chains.

Alternative forms of debt could be cultivated to enable SMEs to invest, expand, and restructure.

Policy attention should be given to the development of hybrid tools and equity instruments to strengthen SMEs' capital structure and boost investment in innovative start-ups and high-growth SMEs.

Special consideration should be given to venture and private equity financing, including capital for seed, early, and later stage investments.

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Supporting SMEs requires a multifaceted approach that addresses their diverse financing needs. Public programmes for SME finance can help catalyse private resources and leverage the provision of risk capital markets.

To strengthen SME access to traditional bank financing, measures like credit guarantees, securitization, credit insurance, and adequate provisioning for loan losses can be implemented. Effective and predictable insolvency regimes should ensure creditor rights while supporting healthy companies.

Policies should aim to enable SMEs to access diverse non-traditional financing instruments and channels, such as asset-based finance, alternative forms of debt, and hybrid tools and equity instruments. This can be achieved by fostering a broader range of financing options and increasing entrepreneurs' awareness of available financing options.

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Public policies should champion SMEs' enhanced financial literacy, awareness, and understanding of available financial instruments. This includes changes in legislation and programs for SMEs.

SME managers should devote due attention to finance issues, acquire skills for accounting and financial planning, and improve communication with investors. They should also respond to disclosure requirements.

Programmes should be tailored to the needs and financial literacy levels of different constituencies, including women, young entrepreneurs, minorities, and entrepreneurs in the informal sector. This ensures that underserved groups have access to the support they need.

Efforts should aim to improve the quality of start-ups' business plans and SME investment projects, especially for the riskier segment of the market.

Access to traditional bank financing is crucial for most small businesses, and efforts to improve banks' capacity to lend to SMEs should be pursued.

Credit guarantees, securitization, credit insurance, and adequate provisioning for loan losses can help achieve this goal. Effective and predictable insolvency regimes should ensure creditor rights while supporting healthy companies and offering a second chance for honest entrepreneurs.

SMEs should be afforded credit on reasonable terms and with appropriate consumer protection measures in place. This includes enabling SMEs to use a broader set of assets beyond fixed collateral, such as movable assets, to secure loans.

The feasibility of expanding the use of intangibles as collateral should be carefully considered, to ease access to lending particularly by knowledge-based companies, while taking into account potential risks.

The Women Entrepreneurs Finance Initiative (We-Fi) is a collaborative effort among 14 governments and six multilateral development banks.

We-Fi was formally established in October 2017 as a Financial Intermediary Fund hosted by the World Bank.

The International Finance Corporation is one of the Implementing Partners for the We-Fi program, using We-Fi funds to support private sector clients with investment and advisory services.

This support aims to expand financial services and market access for women-owned/led firms, as well as increase the capacity of women entrepreneurs to run high-growth businesses.

IFC is working together with other public and private stakeholders to make We-Fi a success and provide opportunities for women entrepreneurs to thrive.

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Designing public programmes for SME finance requires careful consideration of several key factors. These include ensuring additionality, cost effectiveness, and user-friendliness.

To achieve this, programmes should be designed to have financial and economic additionality, meaning they should provide additional benefits to SMEs beyond what they would receive through other means. This is crucial for programmes to be effective.

Programmes should also be cost-effective, meaning they should provide value for money. This can be achieved by minimizing administrative burdens and compliance costs.

Clear and concise language is essential for programmes to be user-friendly. This means avoiding complex terminology and ensuring that eligibility criteria, credit risk management, and fees structure are clearly defined.

Policy coherence across levels of government and between government and non-government bodies dealing with SME finance is also vital. This ensures that programmes are consistent and effective.

Monitoring and evaluation of public programmes to enhance SME finance is essential for their success. This should be done regularly, using clearly defined and measurable policy objectives and impacts.

Evaluation findings should feed back into the policy-making process, allowing for adjustments to be made as needed. This ensures that programmes are continually improving and meeting their stated objectives.

Regular evaluation and monitoring also allows for the sharing of best practices and experiences between regions, nations, and internationally. This can help to identify successful strategies and improve programme effectiveness.

The Global Facility is a key player in closing the financing gap for SMEs in emerging markets. It's a global partnership that was launched in 2012 in response to a G-20 call for expediting SME financing and growth.

The Global SME Finance Facility (GSMEF) aims to generate one million new jobs in the SME sector. This ambitious goal is a testament to the potential of SMEs to drive economic growth and create employment opportunities.

The facility provides investment, risk mitigation, and advisory assistance to financial institutions. This support helps institutions expand lending to underserved SMEs in challenging markets and segments.

GSMEF is funded by government partners, including the UK Foreign, Commonwealth & Development Office (FCDO) and the Kingdom of Netherlands. This public-private partnership model is crucial for scaling up SME finance initiatives.

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Governments can play a crucial role in supporting SME finance through various initiatives. Governments are keen to assist SMEs as they are often unable to raise finance for their profitable projects, potentially leading to lost investment opportunities and lower national wealth.

One way governments support SMEs is by providing grants. Governments also offer tax breaks, such as tax incentives for investing in SMEs. In Scotland, the government-funded organisation 'Business Gateway' provides assistance to those setting up and running a business, including advice on raising finance.

Governments can also guarantee loans, reducing the risk for banks and making them more willing to lend. For example, the UK's 'Enterprise Finance Guarantee' scheme guarantees a large proportion of any loan advanced by a bank. This scheme significantly reduces the risk to the bank, making them more likely to provide loans to SMEs.

Governments can also provide equity investment through government-backed venture capital organisations. These organisations will match any equity investment raised from other sources, as seen in the UK's 'Enterprise Capital Funds' and the US's 'Small Business Investment Company' programme.

To summarise, governments can support SME finance through grants, tax breaks, loan guarantees, and equity investment. Here are some examples of government initiatives that provide these forms of support: