Small and Medium Enterprises:
Overcoming Financing Constraints
Thorsten Beck, Leora Klapper,
Soledad Martinez Peria
DECRG-FI
Firm size, financing patterns & growth:
The 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.
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.
The Impact of Foreign Bank Entry
for 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 borrower’s 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.
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