It’s not just about the money

Across the globe, we continually hear financial  commentators and academics  highlighting the importance  of small and medium-sized  enterprises (SMEs) and the  role they play in various  countries in employment,  engines of economic growth,  social development, and  how they account for  large percentages of gross  domestic product and as  such how the countries’  prospects for prosperity  and the development of  healthy market economies  rest on them. 

In addition, while access  to finance, which restricts  their ability to develop  and flourish, is high on everyone’s list when people  talk about the challenges for  SMEs, we must ask if it is the  only aspect holding back the  development of sustainable  enterprises — because if it is,  then surely it is a simple fix. Economies, business environments, investment climates, and legal  frameworks differ drastically  around the globe, and market  conditions are not stable in  many countries.

As a result, a  one-size approach does not fit  all. However, there are some fundamental aspects/building blocks that exist in varying forms that can provide the foundations to promote growth and competitiveness for small businesses. Vibrant SME sectors need to be supported by efficient advisory ecosystems that provide easy access to advice, knowledge transfer, and skills training, alongside targeted policy interventions coupled with access to finance.

Access to know-how

Business advice programs can play a significant role in providing tools, training, and expertise to SMEs. These can be delivered via the provision of international advisory services as well as local-based consultancy. However, where these elements are missing or are unaffordable, programs need to be developed to train local professionals to assist them in developing into local consultants.

The areas and work undertaken in this area vary considerably, from basic advisory projects such as financial reporting and systems (to help instil financial transparency) through to more bespoke topics like strategy, marketing, energy efficiency, corporate governance, and many more.

Through such an approach, advisory work has a direct impact on SME development and performance, particularly as it helps to increase turnover, assists with job creation, improves productivity, and helps SMEs to develop and grow import/export revenues. The role of governments and donors in helping to fund these is heavily underestimated.

Policy

An increasing number of countries have developed or are improving their regulatory frameworks and introduced targeted policies to support fintech and promote different initiatives.

Examples of these are included in the areas of women in business, youth, immigrants, and incubators for innovation, while others target particular problems and issues for SMEs, such as addressing payment delays (through introducing e-invoicing systems) and opening up government procurement to SMEs through digitalisation.

A strengthened ecosystem removes barriers to accessing finance, provides improved capacity for both public and private institutions to serve SMEs, and ultimately provides platform advocacy for SMEs; this leads to better policies and regulatory support, stronger institutions, and improvements of market effectiveness.

Access to finance

Not all finance is equal. While in general private debt provided by the banking sector has risen over the past decade in more developed countries, SMEs still traditionally look to private sources of capital. As with bank finance, this has tended to be too short in tenor to support growth or too heavily reliant on providing tangible security. The good news is that there is now notable expansion in the use of alternative financing instruments by SMEs, such as factoring, leasing, and hire purchase.

Also, to a lesser extent, crowdfunding is playing a role in some markets. In emerging economies, the role of local banks is important but is often supported and supplemented by the international financial institutions (IFIs) who use the local bank to deliver focused programs that help address the policy objectives mentioned above. Many of these come with technical assistance for the banks so that they can develop these activities into sustainable products that they can upscale.

Not one size fits all

In more developed countries, it is the national government and local government agencies to whom the burden/ responsibility falls to develop and finance much of the non-financial work.

While in emerging markets there is a greater role played by bilateral donors (predominantly wealthier nations), IFIs, such as the World Bank, International Finance Corporation, and European Bank for Reconstruction and Development (EBRD); and institutions such as the Organisation for Economic CoOperation and Development and International Council for Small Business cooperate with relevant host governments. In some countries, greater emphasis is on finance, while in others, the transfer of skills and development of basic policy frameworks are urgently needed to allow access to finance to expand.

In Moldova for example, women entrepreneurs are to benefit from greater access to finance as Prime Capital, a local non-bank financial institution, has joined the EBRD Women in Business initiative. Prime Capital will receive a loan of US$2 million equivalent in Moldovan lei for on-lending to women-led businesses. The financing will promote women’s entrepreneurship and participation in business by assisting with access to finance, know-how and technical advice.

The initiative is led by the EBRD and funded by Sweden, the European Union, and the EBRD’s Small Business Impact Fund, which has Italy, Japan, Luxembourg, South Korea, Sweden, Switzerland, Taipei China, and the US among its donors, as well as the EBRD Early Transition Countries Fund, including Canada, Finland, Germany, Ireland, Japan, South Korea, Luxembourg, the Netherlands, Norway, Spain, Sweden, Switzerland, Taipei, China, and the UK. In Moldova, the program builds on the EBRD’s extensive consulting experience working with local businesswomen.

To date, the bank has helped — through advisory services — over 150 women-led companies to grow. It has also delivered training, mentoring, and longer-term coaching to provide women entrepreneurs with the knowledge and confidence to take the next step.

Prime Capital will also benefit from technical support in order to better serve women-led businesses. The EBRD’s Women in Business program, launched in 2014, is currently operating in 23 countries and has helped more than 60,000 women entrepreneurs to access finance and receive advice for their businesses.

The program has provided over €500 million in loans to women-led businesses. In addition, Prime Capital will receive US$1 million equivalent in Moldovan lei for on-lending to micro, small, and medium-sized enterprises in Moldova.

The EBRD is the leading institutional investor in Moldova and has so far invested over €1.3 billion through almost 130 projects. The bank also provides business advice to local small and medium-sized enterprises and has helped about 1,000 Moldovan firms improve their performance and growth.

In conclusion, providing the money is a great start but does it resolve the issues facing SMEs if we want them to be the powerhouses of our economies? It is undisputed that SMEs need access to finance to grow and develop, but they also need much more.

There is no silver bullet solution; rather, it requires a combination of factors to be present and these will vary from country to country and from time to time, but at least we know what the ingredients are. Developing each recipe, however, is the challenge that requires continued and improved coordination and co-operation from a cast of characters.

Andrew McDonald chair, Small Business Investment Committee, the European Bank for Reconstruction and Development (EBRD)