Small and Medium Enterprises (SMEs) Finance

The amendment to the Late Payments Directive (requiring public authorities to make payments within 30 days, which serves as a security guarantee for SMEs) and the Directive on e-invoicing (giving e-invoices equal status to paper ones) are particularly helpful to small businesses. Furthermore, the modernisation of EU public procurement policy means that SMEs now experience lighter administrative burdens when accessing public procurement and have better opportunities for joint bidding. The same approach has been found to simplify financial reporting obligations and to reduce administrative burdens for SMEs through the modernisation of both public procurement in the EU and the Accounting Directive (now Directive 2013/34/EU).

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Small and medium-sized enterprises

Micro, small and medium-sized enterprises (SMEs) constitute 99% of companies in the EU. They provide two-thirds of private sector jobs and contribute to more than half of the total added value created by businesses in the EU. Various action programmes have been adopted to increase the competitiveness of SMEs through research and innovation, and to provide better access to finance. Achieving carbon neutrality and the digital transition have also been taken into account in the strategies adopted to ensure better framework conditions for SMEs. Furthermore, the impact of the COVID-19 pandemic has stimulated new thinking about economic recovery, reconstruction and building SME resilience.

SMEs operate mainly at national level, as relatively few are engaged in cross-border business within the EU. However, independently of their scope of operations, SMEs are affected by EU legislation in various fields, such as taxation (Articles 110 to 113 of the Treaty on the Functioning of the European Union (TFEU)), competition (Articles 101 to 109 TFEU) and company law (right of establishment — Articles 49 to 54 TFEU). The Commission’s definition of SMEs can be found in Recommendation 2003/361/EC.

Small and Medium Enterprises (SMEs) Finance

Small and Medium Enterprises (SMEs) play a major role in most economies, particularly in developing countries. SMEs account for the majority of businesses worldwide and are important contributors to job creation and global economic development. They represent about 90% of businesses and more than 50% of employment worldwide. Formal SMEs contribute up to 40% of national income (GDP) in emerging economies. These numbers are significantly higher when informal SMEs are included. According to our estimates, 600 million jobs will be needed by 2030 to absorb the growing global workforce, which makes SME development a high priority for many governments around the world. In emerging markets, most formal jobs are generated by SMEs, which create 7 out of 10 jobs. However, access to finance is a key constraint to SME growth, it is the second most cited obstacle facing SMEs to grow their businesses in emerging markets and developing countries.

SMEs are less likely to be able to obtain bank loans than large firms; instead, they rely on internal funds, or cash from friends and family, to launch and initially run their enterprises. The International Finance Corporation (IFC) estimates that 65 million firms, or 40% of formal micro, small and medium enterprises (MSMEs) in developing countries, have an unmet financing need of $5.2 trillion every year, which is equivalent to 1.4 times the current level of the global MSME lending. East Asia And Pacific accounts for the largest share (46%) of the total global finance gap and is followed by Latin America and the Caribbean (23%) and Europe and Central Asia (15%). The gap volume varies considerably region to region. Latin America and the Caribbean and the Middle East and North Africa regions, in particular, have the highest proportion of the finance gap compared to potential demand, measured at 87% and 88%, respectively. About half of formal SMEs don’t have access to formal credit. The financing gap is even larger when micro and informal enterprises are taken into account.

  • Financial sector assessments to determine areas of improvement in regulatory and policy aspects enabling increased responsible SME access to finance
  • Implementation support of initiatives such as development of enabling environment, design and set up of credit guarantee schemes
  • Improving credit infrastructure (credit reporting systems, secured transactions and collateral registries, and insolvency regimes) which can lead to greater SME access to finance.
  • Introducing innovation in SME finance such as e-lending platforms, use of alternative data for credit decisioning, e-invoicing, e-factoring and supply chain financing.
  • Policy work, analytical work, and other Advisory Services can also be provided in support of SME finance activities.
  • Advocacy for SME finance at global level through participating and supporting G20 Global Partnership for Financial Inclusion, Financial Stability Board, International Credit Committee for Credit Reporting on SME Finance related issues.
  • Knowledge management tools and flagship publications on good practice, successful models and policy frameworks

In Lebanon, the Innovative Small and Medium Enterprises (iSME) project is a $30 million investment lending operation providing equity co-investments in innovative young firms in addition to a grant funding window for seed stage firms. As of August 2019, iSME’s co-investment fund has invested $10.23 million across 22 investments and has been able to leverage $25.47 million in co-financing, demonstrating its ability to crowd in private sector financing and expand the market for early stage equity finance in Lebanon. To date, 60 out of 174 grantees had leveraged the iSME funding to raise a total of $13.1 million from various funding sources, a leverage ratio of 5.3 times. Overall, stakeholders’ consultations suggest that the iSME project could play an even larger role in the future financing of the Venture Capital (VC) sector by supporting existing VCs and emerging players, including increasing attention on a fund of funds approach, which could also cover growth funds (later stage and private equity).

In India, our MSME Growth, Innovation and Inclusive Finance Project improved access to finance for MSMEs in three vital but underserved segments: early stage/startups, services, and manufacturing. A credit line of $500 million, provided to the Small Industry Development Bank of India (SIDBI), was designed to provide an affordable longer-term source of funding for underserved MSMEs. Technical assistance of about $3.7 million complemented the lending component and focused on capacity building of SIDBI and the participating financial institutions (PFIs). In addition to directly financing MSMEs, disbursing a total of $265 million in loans, the project pushed the frontiers of MSME financing through the development of innovative lending methods that reduced turnaround time, reached more underserved MSMEs, and crowded in more private sector financing. It also reached new clients, women-owned MSMEs, and MSMEs in low-income states. The project supported SIDBI to scale-up of the Fund of Funds for Startups, which aims to indirectly disburse 800.5 billion to startups by 2025. SIDBI’s “contactless lending” platform, a digital MSME lending aggregator and matchmaking platform, has crowded in 800.9 billion of private sector financing for MSMEs, making it the largest online lender in India.

Impact of National Franchises

You’ve likely already heard plenty about the damage that national franchises do to local small businesses. Chain restaurants and department stores have shuttered many locally owned shops across the country. On a local level, these franchises may have a harmful effect on the overall economy, especially in smaller towns where businesses rely on being the only restaurant or shop of its type in the area.

However, on a national level, franchises do help strengthen the overall economy. Even locally, residents can benefit from the business opportunities and jobs that come from a franchise opening a location in the area. Although you have more control if you open your own small business, you may be able to purchase a franchise at a fraction of the price and have the support you need to run your business if you’re new to the practice.

Benefits for Employees

For today’s graduates, small and midsized businesses can put a wrinkle in the decisions they make as they start their career. A college graduate may find himself with two job offers – one from a well-known company with great benefits and the other a small business with a promising work culture, but less impressive healthcare and retirement savings offerings. For younger adults who aren’t yet concerned about retirement, small businesses can be enticing, especially if they’re offering perks like flexible work hours and a ping pong table in the break room.

Most important in a young professional’s decision is the culture fit that a business will bring. If a small business is open to flexible work hours and creative freedom, for instance, that likely will override any concerns about copays at the doctor’s office. Although many small businesses may not have pension plans, employees are often given the option of contributing to an individual retirement account like a 401(k). If not, they can consult a financial adviser to start setting money aside on their own if they choose the small business route.

Stephanie Faris is a novelist and business writer whose work has appeared on numerous small business blogs, including Zappos, GoDaddy, 99Designs, and the Intuit Small Business Blog. She worked for the State of Tennessee for 19 years, the latter six of which were spent as a supervisor. She has written about business for entrepreneurs and marketing firms since 2011.


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