Introduction
Welcome to the INBETS SME Financing Kit! The Financing Kit is divided into 5 sections:
- Introduction
- SME Financing - Best Practice Models
- Alternative SME Financing Models
- Course conclusion
Key challenges regarding SME Financing
SME skills and strategic vision are a key ingredient to any effort to broaden the range of financing instruments. The limited awareness and understanding about alternative instruments on the part of SMEs have limited the development of these markets. It is not only a matter of increasing knowledge about individual instruments, but also supporting SMEs in developing a long-term strategic approach to business financing, that is, understanding how different instruments can serve their different financing needs at specific stages of the life cycle, the different advantages and risks implied, and the complementarities and possibility to leverage these sources.
It is necessary to improve the quality of SMEs' business plans and investment projects, especially for the development of the riskier segment of the market. In many countries, a major impediment to the development of equity finance for small businesses is the lack of "investor-ready" companies.
SMEs are generally ill-equipped to deal with investor due diligence requirements. Indeed, an increasing concern about the lack of entrepreneurial skills and capabilities and low quality of investment projects is driving more policy attention to the demand side, although supply-side policies are still prevalent. This includes measures such as training and mentoring.
The regulatory framework is a key enabler for the development of instruments that imply a greater risk for investors than traditional debt finance, from asset-based finance to equity financing. Thus, designing and implementing effective regulation, which balances financial stability, investors’ protection and the opening of new financing channels for SMEs, represents a crucial challenge for policy makers and regulatory authorities. This is especially the case given the rapid evolution in the market, resulting from technological changes as well as the engineering of products that, in a low interest environment, respond to the appetite for high yields by financiers. New financing models are emerging that may engage relatively inexperienced investors, such as in the case of crowdfunding, or in which the misalignment of incentives may place at risk the stability of the system, which is made more vulnerable to risk by an increased interconnectedness of financial markets.
Addressing information asymmetries and increasing transparency in the markets are other priorities to boost the development of alternative financing instruments for SMEs. Information infrastructures for credit risk assessment, such as credit bureaux or registries or data warehouses with loan-level granularity, can reduce the risk perceived by investors when approaching SME finance and help them identify investment opportunities. Reducing the perceived risk by investors may also help reduce the financing costs which are typically higher for SMEs than for large firms. The higher risks and costs stem from the large heterogeneity and opacity of the SME sector, with entrepreneurs often less prone, willing or able to share risk-sensitive information.
- Introduction