Access to Finance for SMEs: Inclusion Anchored in Understanding
Small and Medium-sized Enterprises (SMEs) generate a majority of global GDP and 70% or more of global employment. It is also widely known that 25% of these businesses fail in the first year, with 50% no longer in operation after five years.
SMEs attract well-meaning attention from policymakers, academics and senior practitioners in international institutions, all wanting to “help”. This includes around the perennial challenge of SME Access to Finance (A2F).
How are these professionals meant to realistically develop viable and scalable solutions? When was the last time an academic, banker, government official or international bureaucrat built a business ground up? The answer is most likely never. Yet, SME-related solutions are designed by many of the very same people. How can one build SME-related solutions without the direct experience of SME-related challenges?
By bringing SMEs to the table when designing solutions for them.
This may seem obvious, but it is not as common a practice as it should be, and when it does happen, often it is after the fact, or in an atmosphere of “let us tell you what you need.”
SMEs should be treated as equal partners in the conception, design and deployment of SME-related solutions.
“Defining” an SME
The technical definition of an SME varies by country and may vary within a country. It can be based on annual turnover or the number of employees in a business, and the thresholds vary by the size of the economy in which a business is based. An SME in one jurisdiction could be considered a large corporate in another. The difference between an “S” and an “M” can be massive.
To meaningfully and substantively address challenges like A2F, it is more important to understand the character and qualities of an SME than its technical definition.
An SME is a complex commercial venture, with typically resilient, determined and innovative founders who compete – locally or internationally – across a wide range of environments.
With this reality in mind, SMEs can be redefined as co-creators of solutions, not passive, “helpless” recipients of assistance – no matter how well-intentioned - from various ivory towers.
Survival of SMEs and the Perennial A2F issue
It bears repeating: 25% of SMEs fail in the first year, and 50% are no longer in operation after five years.
“Successful” SMEs, then, for which financing is an issue, have likely already surmounted the challenge of survival, and have proven to be creative, resilient and adaptable across a wide variety of conditions, circumstances and unexpected shocks.
These SMEs don’t need “help”.
They need partners who understand their day-to-day realities and can develop practical solutions. The SME A2F issue needs to be addressed through a “Reality-Based Approach”, rooted in a genuine understanding of what it means to build, lead and run a business.
Peers, Partners and Co-Designing of Solutions
SMEs should be at the heart of design, not at the periphery of process while addressing SME A2F challenges. Current mechanisms at the policy, regulatory or product level are partially useful at best. Effective and sustainable solutions can be successfully deployed if they are steeped in co-design.
SME financing discussions often focus on the same alleged and overplayed challenges:
SMEs are financially unsophisticated or financially illiterate
Their founders are unable to prepare “bankable proposals”
They lack collateral or other forms of security to support a loan
SME credit histories are limited (or non-existent in markets where credit reporting is not available)
SMEs are already cash-poor and by definition present a poor credit risk
Every one of the foregoing statements will be partially accurate. They do, however, fail to acknowledge that many attempts to solve A2F tend to push the square-pegged SME into the familiar round holes of generic policy, cookie-cutter credit and lending practices and poorly selected risk criteria.
Rethinking Adjudication and Financing
“Bankers in some parts of the world think they are the kings of the universe”, said a financier in Ankara some years back. “In other parts of the world, we respect and revere farmers and small businesspeople – those who feed our communities, bring solutions to our countries and bread to the tables of our families. Bankers see their work as the privilege of supporting those who bring real value and do real work…”
Combining a more realistic perception of an SME and repositioning financier on the “spectrum of importance” can better support a co-design approach to the “intractable” A2F problem.
The process might begin with an SME “needs assessment” along with an analysis of the way an SME perceives the importance of financing. Co-design can and should extend to pricing of loans, as well as the adjudication and risk assessment process. On the pricing question for example, financiers may be pleasantly surprised at the premium that SMEs might be willing to pay, to access liquidity on practical terms and in a timely manner.
Targeted financing options such as forms of supply chain finance are showing potential. However, several are heavily dependent on global banks and investment-grade buyers for design and deployment. Even those promoted as “deep tier” financing targeting SME suppliers generally do not involve the SMEs in their design process.
Next Steps in the A2F Challenge
Success in driving financing and liquidity to SMEs will demand new perspective, a reality-based model and a better understanding of what it means to be an SME successful enough to require financing.
Success at scale will require SMEs to be at the table through the conception, design and deployment of A2F solutions, across the solution lifecycle. This includes risk, credit adjudication and the enabling policies, processes, standards and technologies to truly address the global, systemic A2F challenge.
SMEs must be equal partners in the solution design process.
Red Sangria. Human Powered. Every Time.
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