As global leaders prepare to attend the G20 summit in Mexico (18–19 June), they have been urged to offer more support to Small and Medium Sized Enterprises (SMEs) in gaining access to finance, by ensuring that a more widespread approach is taken to policy development for the sector and that there are greater levels of co-ordination at a global level.
The ACCA (Association of Chartered Certified Accountants) Global Forum for SMEs has said in its new Global Agenda on Access to Finance for SMEs, that more co-ordinated and consistent efforts are needed when it comes to SME financing policy.
Mexico, which holds the Presidency of the G20 for 2012, has put fostering financial inclusion to promote economic growth among its five priorities for the G20 this year.
The Global Forum's agenda outlines the challenge facing the G20 in these areas, saying that SMEs around the world need - but are not receiving $4 trillion in financing - and that official ‘SME’ or ‘enterprise’ policy forms only a small part of the actual policies relevant to the development of SMEs.
The Global Forum argues that more attention ought to be given to how central government departments impact on SMEs who may have more influence on how SMEs access finance than the departments or agencies responsible for business and enterprise. For example, those departments responsible for fiscal policy, justice or employment law may well have a bigger effect on SMEs’ access to finance – through their decisions on tax policy on equity funding, setting up or developing better access to efficient credit information facilities right through to well-functioning property and contract law frameworks.
While governments are right to try to address the funding gap for SMEs by offering loan guarantees or providing SME funds from the central budget, they need to consider carefully how sustainable these are, especially where they seek to heavily subsidise the cost of borrowing. The full potential for defaults on such schemes cannot be deduced from the first years of operation, during which scrutiny tends to be highest. Awareness levels of the schemes also need to be carefully addressed where the demand for such products is often low.
Official institutions, such as banks, through which these funds and products are often channelled, need to be encouraged to promote them more actively to their SME clients.
The agenda also says that while banks remain the most significant source of external finance for formal small firms, bank finance is generally only available to those businesses that can offer collateral or a strong record of generating profit. This leaves a large number of SMEs which need large investments, but which have mostly intangible assets. While it is right that much effort is invested in encouraging banks to reach out to the SME sector and provide more suitable financial products to existing clients, alternatives to bank lending need to generate similar attention and investment in order to build more complete financing markets for SMEs.
While the microfinance sector is offering a promising solution by tapping into social networks on the ground for the information that banks are missing, the extent to which it helps the SME sector needs to be better understood at a macro level, especially where experiences from a number of markets can be shared. The option of equity finance also needs to be improved, and emerging and innovative financing solutions need to be encouraged and supported, including 'crowd funding', which uses online communities for raising equity.
Without the buy-in of a major industry, these alternatives to bank lending run the risk of not fulfilling their potential. While more research is needed to enable evidence-based policy, these efforts need to be highlighted at a global level to ensure that the goodwill and the potential for greater levels of financial inclusion behind many such initiatives are harnessed for the benefit of small business.
The agenda also says that while a lot of emphasis is placed on how companies present their business plans when approaching lenders or investors, more should be placed on finding out how sound internal governance practices are implemented and communicated. This approach should be promoted within the global policy circles with the aim of sending strong messages to national policymakers. SMEs should also be encouraged to consider how they use technological solutions in helping them with financial management.
The agenda says that the skills gap among business owners need to be addressed. Very few have formal enterprise or management training which has an impact on their ability to access finance – from having the knowhow to present a business plan, navigating through the financial markets on offer, to knowing how to apply business skills and acumen to manage and grow their business with a strategic approach to its operations, and ultimately finance.
It calls on the accountancy profession to address this challenge, and to work with governments and other relevant institutions such as SME bodies, to provide financial literacy and management training for owner-managers. The Forum urges international organisations to work with national governments to encourage much wider use of such initiatives in the interest of raising the level of skills, with a particular emphasis on working with the existing SME intermediaries to enable a reliable access to the sector.
'Small businesses around the world all face the same challenge - which is how they access finance. With an estimated 420-510 million SMEs worldwide, which between them have an unmet need of nearly $4trillion in funding, the way in which they access the capital they need to start, survive and grow is of paramount importance to the global economy.
'There are a range of issues which policy makers, banks and the accountancy profession need to address and we urge the G20 to consider many of these problems at its meeting. There are persistent market failures that stand in the way of a long-lasting change in SME financing across the world and we hope the G20 can begin to address them, and we look forward to discussing these issues further with G20 members and other bodies around the world,' said Mark Gold, Chairman of ACCA's Global Forum for SMEs.