Financing SMEs and entrepreneurs:

Recent trends and the role of financial skills

OECD/GFLEC Global Policy Research Symposium to Advance Financial Literacy

Paris, 7 May 2015

Miriam Koreen, Deputy Director

OECD Centre for Entrepreneurship, SMEs and Local Development

Gert Wehinger, Senior Economist,

OECD Directorate for Financial Affairs

Financing SMEs and Entrepreneurs:

An OECD Scoreboard

• Indicators on access to finance for SMEs

• Information about relevant government policies

• 34 countries

• Data for 2007-13.

=> Comprehensive framework to evaluate the state of SME finance.

Credit to SMEs decreased in many countries since

2011…

Trends in outstanding SME loans 2011-13

Year-on-year growth, percentages

Expansion since 2011 Contraction since 2011

Alternative forms of finance cannot currently

compensate for the contraction of bank credit

Global crowdfunding market* Factoring volumes, average increase in the OECD, 2007 = 1

1

1.2

1.4

1.6

1.8

2

2.2

2.4

2007 2008 2009 2010 2011 2012 2013

* Data from Massolution

There is a pressing need to broaden the range of

financial instruments for SMEs and entrepreneurs

Low Risk/ Return

Low Risk/ Return

Medium Risk/ Return

High Risk/ Return

Asset-Based Finance

Alternative Debt “Hybrid” Instruments

Equity Instruments

Asset-based lending

Factoring

Purchase Order Finance

Warehouse Receipts

Leasing

Corporate Bonds

Securitised Debt

Covered Bonds

Private Placements

Crowdfunding (debt)

Subordinated Loans/Bonds

Silent Participations

Participating Loans

Profit Participation Rights

Convertible Bonds

Bonds with Warrants

Mezzanine Finance

Private Equity

Venture Capital

Business Angels

Specialised Platforms for Public Listing of SMEs

Crowdfunding (equity)

External financing instruments alternative to traditional debt

…but their development calls for a number of policy actions

Effective regulation that balances financial stability and the opening of new financing channels for SMEs

Development of information infrastructures to reflect more accurately the level of risk associated with SME financing and encourage investors’ participation

Implementation of policies that incentivise private investors and develop appropriate risk-sharing mechanisms

Building up the evidence base to identify good policy practices

Improvement of SME skills and strategic vision for their financing needs

The financial knowledge of entrepreneurs represents an

important barrier to financial diversification

Lack a long-term strategic view of financing needs

Entrepreneurs may not know about many alternative instruments and need skills to match the instruments with the financial needs of their business.

Instruments not always perceived positively, especially for equity instruments

Entrepreneurs require financial skills to attract them

Policy implications

Supply-side policies to develop financial markets for SMEs will have limited success without tackling demand-side issues

Investor-readiness programmes are needed to expand the use of BA and VC investments

Demand-side policy initiatives have been undertaken:

Financial literacy programmes

Investor-readiness programmes

The provision of mentoring, advisory or training facilities, often in addition to financial support (e.g. through business incubators)

Policies should be evidence-based and reviewed through evaluations

9

Putting our work on SME finance in context

Source: OECD Secretariat, based on an exhibit by the European Investment Fund (EIF). Adapted from [DAF/CMF(2014)25]

1 2

NAEC

New study: Opportunities and limitations

of public equity markets for SMEs

Opportunites Problems & limitations

Development of small IPO

markets could incentivise

investment in SMEs

Enhanced allocation of risk and

risk taking, supporting growth

Broadening of investor base for

SMEs

Makes SMEs an “investable” asset

class for institutional investors

Longer-term repeat access to

financing beyond IPO

Increased creditworthiness,

transparency and visibility

through association with a

dedicated ecosystem

An equity gap for risk financing, in particular for fast-

growing companies, not to be closed by banks

Admission cost and listing requirements in main markets

are often discouragingly high for SMEs

Limited ecosystems (exchanges, platforms, brokers, market-

makers, advisors, equity research)

Limited liquidity is key challenge in publicly traded SME

equity

Educational gap of SMEs with regard to equity financing,

and the limited awareness of SMEs when it comes to equity

instruments, limits their access to such instruments

Lack of a (risk) equity culture and asymmetric

treatment of equity and debt financing in some cases (e.g. tax

treatment) limits participation by both institutional and retail

investors

10

The share of SME financing provided through equity markets is currently very small

but equity capital is critical to growth

Don’t miss the opportunities of market-based SME finance!

> Some implications for policy makers

11

Provide support for raising awareness about the availability and attractiveness of

financing alternatives for SMEs and financial intermediaries

Both among SME entrepreneurs & smaller local financial institutions traditionally

serving SMEs

Official sector–private sector co-operation in improving the visibility of successful

transactions and platforms

Increase (retail) investor participation in SME financing , tapping an abundant

source of capital, by

the provision of tax and other incentives (small caps in UK ISA, French PME-PEA)

developing standardised “off-the-shelf” versions of non-bank financing instruments

for SMEs

increasing transparency (loan-level data/ performance track records, ongoing

reporting and data sharing)

Creating indices to enhance liquidity & investor participation

Thank you!

Miriam.koreen@oecd.org

Gert.wehinger@oecd.org