Entrepreneurs come in all shapes and sizes, from the hip fintech startup, or family business on the high street to the home-based manufacturer using 3D printers and the power of the Internet to reach new markets.
Their financing needs vary wildly as well. But every entrepreneur will agree that cash flow is the lifeblood of any business. SMEs also need cash to fuel their growth— especially when they are scaling up or exporting to another market.
Consequently, financing is an important part of the SME ecosystem.
Traditionally, SMEs have relied heavily on debt financing, particularly through banks. This has made SMEs particularly vulnerable to banking system dynamics, with constrained access to financing arising in times of financial stress. This was starkly illustrated during the financial crisis of 2008-09, where the credit crunch significantly reduced access to capital for SMEs.
Since then, the landscape for SME financing has evolved significantly. Credit availability for SMEs has recovered, as interest rates have come down, credit conditions have improved, and payment delays have declined. In recent years, alternative sources of SME finance have also appeared on the scene: equity instruments, leasing and factoring, non-bank lending, and even fintech instruments like P2P financing and cryptocurrency offerings.
Despite this, SMEs have substantial structural disadvantages in obtaining financing compared to large corporations. These structural disadvantages arise mainly from limitations inherent to the small size and heterogeneous nature of SMEs, which also undermine the profitability of SME-related market transactions. Such structural limitations mainly manifest in terms of issuance costs disproportionate to the respective deal sizes, risk assessment, financial sophistication, reporting capabilities, and communication (particularly financial transparency). This coincides with financing gaps within the SME population: micro-enterprises, startups, and innovative ventures are likely to be underfunded despite the prevalence of venture capital.
SME FINANCING THROUGH BANKS
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