5 ways to help finance SMEs

Small and medium-sized businesses, often owned by a single person or a small team of entrepreneurs, are a driving force in job creation and local economic development. They provide much of the essential goods and services for poor people and their communities.

Financing small and medium-sized enterprises (SMEs) is challenging for financial institutions for a number of reasons, but especially because a lack of information makes assessing and serving this sector difficult and expensive.

A number of factors affect SME financing. Some developed countries take a capitalistic approach with little government incentives for SME financing, while others use government guarantees and other measures to reduce risks and costs. In emerging economies, to date, most SMEs (including formal sector firms) are financed from sources outside the formal financial sector, which is expensive for the enterprise and can hamper the flow of financing, thus hindering its growth. New capital requirements and banking regulations imposed on financial institutions worldwide are making the financing of SMEs even more difficult and expensive.

Against this backdrop, the emergence of alternative, technology-enabled means of financing, such as new business models based on advanced data analytics, supply chain- and e-commerce-based finance, crowdfunding and other innovations may offer a way out of the information/cost trap.

The World Economic Forum’s Global Agenda Council on the Future of Financing & Capital aims to foster the flow of financing to the real economy, with a particular focus on finance for SMEs.

This will involve, among other things, innovations in:

• Supply-chain financing and government procurement
• Use of technology to reduce risks, enhance efficiency leading to lower costs
• Securitization and other means of obtaining capital relief for traditional sources of finance
• Introducing non-traditional sources of long-term capital
• Capacity building for both financiers and SMEs

However, perhaps even more important is the need to catalyse exchange of knowledge, expertise and experience from both the demand and supply sides. Sharing the same approach to common issues, identifying best practice, replicating excellence – wherever that may be – should help create scale and momentum.

To this end, the SME Finance Forum has taken early steps to create a focal point for this sort of exchange and networking. Established by the G20 (and presently managed by the International Finance Corporation), its web and social media presence already generates active discussion among its several thousand members.

Specialist forums of this kind could significantly bridge the knowledge deficit in SME finance. With a critical mass of members and visible support from some of the largest financial institutions across the world, such a forum could foster a virtuous cycle of knowledge, leading to a greater flow of funds to SMEs.

Authors: Lutfey Siddiqi is Adjunct Professor at the National University of Singapore. Matthew Gamser is Chief Executive Officer of the SME Finance Forum. Both authors are members of the Global Agenda Council on Financing & Capital.

Image: Workers cross London Bridge, with Tower Bridge seen behind, during the morning rush hour in London September 30, 2011. REUTERS/Paul Hackett