Innovation in Financing SMEs: An Opportunity for SMPs

While generalizations regarding small- and medium-sized entities (SMEs)—across countries, regions, industry, size, and so on—are hard to make, research, including IFAC’s, suggests that SMEs find accessing finance a significant challenge today, just as it was a decade ago. Yet what has changed considerably over the last 10 years is the variety of financing options, which presents a smorgasbord of alternatives to what was once limited largely to bank financing.

While most SMEs are interested in tapping these alternative sources, research indicates that this market will only realize its potential if the accountancy profession—especially accountants employed by or providing services to SMEs—familiarizes itself with the options. It is both a challenge and an opportunity for small- and medium-sized accounting practices (SMPs): they often help SMEs gain access to financing—identifying suitable options, as well as preparing, presenting, and providing assurance on financial and other information for prospective financiers. If SMPs can become experts in these alternatives, they can play a key role helping SMEs navigate them and gain access to financing. But that’s not all: SMPs can also play a role in creating similar sources in their own jurisdictions and shaping the appropriate supportive regulatory environment.

In this article I review the current global state of SME access to finance—especially in relation to tightened credit resulting from the global financial crisis—take a closer look at some of the new options, and invite readers to share examples of innovative sources of finance for SMEs that have gained traction in their countries.    

Finance Challenge

Raising capital has always been one of the greatest challenges for the growth and sustainability of SMEs. The International Finance Corporation estimates that the total unmet need for credit by SMEs globally ranges from US$2.1tn to US$2.6tn and, of the six countries reviewed, new bank lending to SMEs declined by 47 percent since pre-crisis peaks.

IFAC research corroborates the extent of this challenge. The results of the latest IFAC Global SMP Survey of over 5,000 SMPs indicate that difficulty accessing finance ranks as a major challenge for SMEs, albeit one eclipsed by rising costs and economic uncertainty. The majority of respondents (87%) reported that at least some of their SME clients seeking financing experienced difficulty in 2014.

Conditions vary greatly from country to country; the Organisation for Economic Co-operation and Development (OECD)’s recently-issued annual Financing SMEs and Entrepreneurs: An OECD Scoreboard reveals access to finance remains problematic in many countries.

SMP Micro Poll on Innovation in SME Finance

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Innovation
The economic implications of this credit gap are huge, since SMEs constitute the vast majority of entities globally, as the Association of Chartered Certified Accountants (ACCA) among others testifies. Equally important are the social impacts. In many, if not most, jurisdictions SMEs employ the majority of workers in the private sector, and SMEs tend to be a channel to employment for many disadvantaged and minority groups, as well as female and young workers.

Largely thanks to disruptive technologies, a profusion of innovations is democratizing access to capital, especially for SMEs, and making them less reliant on traditional bank financing. Alternative mechanisms such as crowdfunding, seed and angel funding, value chain finance, and venture capital are changing the landscape and quickly evolving to become significant sources of financing for SMEs. SMEs can now look elsewhere if the banks turn them down as the Economist recently reported. ACCA has summarized many of these innovations in its paper, Innovations in Access to Finance for SMEs. 

Crowdfunding, in particular, has been making headlines. The Economist reported that crowdfunding platforms raised US$16.2bn last year. Meanwhile, a study by the World Bank predicts crowdfunding will be a disruptive global influence—as a game changer for Islamic finance, a means of empowering women, a way to finance youth entrepreneurship and employment in the Middle East, and as a truly global, borderless financing platform.

Growth is highest in Asia, propelling the region past Europe to become the second-largest crowdfunding region after North America. The World Bank estimates that the market for crowdfunding will reach US$96bn in 2025, with China accounting for over half that figure.

The examples at the end of this article illustrate some of the most innovative financing options for SMEs.

Regulation

Critical to the success and sustainability of innovations in SME financing is the willingness of governments and large financial institutions to embrace them and enable the necessary regulatory reforms to support the growth of SMEs and entrepreneurs around the world. Regulation demands a balance between consumer and investor protection and capital formation. Accountants can also play a role here, by helping shape the appropriate policy and regulatory frameworks and leading the debate around workable, innovative financing mechanisms

Unfortunately, as the Financial Times reported, the regulatory response remains slow, especially in Asia, which is characterized by bank-centric financial systems that present greater obstacles for SMEs than larger firms. The APEC Business Advisory Council, in its report entitled APEC Framework for Innovative SMME Financing Mechanisms, calls on economic leaders and governments from the Asia Pacific region to provide an enabling regulatory framework and environment that can support a diverse range of financial institutions and products. The report acknowledges that governments need to play a key role and recommends they consider a variety of measures, including the provision of tax credits and seed funds, as a stimulus in the development of a vibrant SME financing ecosystem.

The European Commission is currently undertaking a substantial project to build a Capital Markets Union, with a primary sub-theme of addressing the regulatory impediments that have made it hard for SMEs to raise finance in Europe.

We Would Like to Hear from You

We are keen to hear of other innovative approaches to SME financing and encourage you to share them in the comments below. Through sharing such experiences and knowledge, we believe that the accountancy profession can play a major role in improving access to finance. A future article will feature these approaches suggested by readers.