Small and Medium Enterprises: Overcoming Financing Constraints

1
Small and Medium Enterprises Overcoming
Financing Constraints

• Thorsten Beck, Leora Klapper,
• Soledad Martinez Peria
• DECRG-FI

2
Firm size, financing patterns growthThe
Empirical Evidence

• Research based on the World Business Environment
• Survey of 4,000 firms in 54 countries shows
• Financing obstacles constrain firm growth firms
  reporting higher obstacles grow more slowly.
• Size is of critical importance small firms are
  the most adversely constrained by financing
  obstacles.
• Small firms use less external finance, esp. less
  bank finance, but more informal finance.

3
How financial and institutional developments
affect SME financing

• In countries with higher levels of financial and
  institutional development, firms finance a larger
  share of investment with external, esp. bank
  equity finance, a smaller share from informal
  sources.
• Property right protection increases the use of
  external finance more for small than for large
  firms.
• Financial development alleviates the impact of
  financing obstacles on firm growth.
• Financial and institutional development helps
  leveling the playing field small firms benefit
  more from financial and institutional development
  than large firms.

4
The Impact of Foreign Bank Entryfor SME Financing

• Latin America study
• Foreign banks with a small local presence do not
  appear to lend much to small businesses
• Large foreign banks in many cases surpass large
  domestic banks.
• From analysis of borrowers perceptions across 36
  developing countries
• Financing obstacles (High interest rates and
  access to long-term loans) are lower in countries
  with high levels of foreign bank penetration
• Strong evidence that even small enterprises
  benefit in some ways and there is no evidence
  that they are harmed by foreign bank
  participation.

5
The Role of Factoring for SME Financing

• Factoring is the sale of accounts receivables at
  a discount
• Advantages for SMEs
• Does not require good collateral laws or
  efficient judicial systems
• Export factoring can facilitate and reduce the
  risk of international sales
• Reverse Factoring allows small, risky firms with
  large high-quality buyers to transfer credit
  risk and borrow on the credit risk of customers.
• Benefits lenders, small sellers, and large
  buyers
• Lender low information costs and credit risk
• SME Seller Access to working capital financing
• Big Buyer Ability to negotiate better terms
  with its suppliers and outsource supplier
  payments.
• Challenges in developing Countries
• Taxes (VAT, Stamp, interest deductions)
• Regulations (cross-border, prudential
  supervision, license fees, capital requirements)
• Legal code (Factoring Act)
• Accurate and comprehensive credit information