Global business leaders, in turn, are asking governments to spur on bank lending and other forms of SME business finance. “Governments [should] expand their focus from guardians of financial stability towards enablers of growth and investment,” said a joint report from two influential international business organizations.2
SME business finance was severely impacted by the financial crisis in 2008, with uneven recovery over the following five years, according to the OECD Scoreboard. Since 2013, a more positive trend has emerged for SMEs, due to the global economic recovery, coupled with relatively favorable financial conditions. This trend is expected to continue – if the recovery continues.3
U.K. SME Business Finance Terms Improve on the Global Average
Overall, new lending to SMEs increased 6.4 percent in 2015 and total SME loans outstanding were up 1.6 percent, with improvements in the majority of countries surveyed, the report said. In Britain, though, new lending to SMEs increased 18 percent in 2015, well above that global median, to £26.6 billion.4 Globally, SME interest rates hit record lows, falling by 0.5 percent to a median value of 3.9 percent. And again, U.K. SMEs saw better rates, averaging 3.33 percent, the lowest level seen in the reporting period (dating back to 2008).
But at the same time, U.K. SME collateral requirements rose to the highest level in the reporting period. The OECD report noted that 44.2 percent of U.K. SMEs needed collateral to obtain bank lending in 2015, compared with 35.4 percent in 2014. The prior peak, 39.2 percent, occurred in 2014, while the lowest percentage (23.0) occurred in 2009. Total outstanding business loans to SMEs dropped 1.6 percent in the U.K., and about one in five SMEs were rejected for a loan in 2015.
Business Finance Conditions Vary
SME credit conditions vary in different countries, according to the Scoreboard. “In countries most affected by the financial crisis, bank lending has trailed the economic recovery in recent years, and many SMEs continue to face inadequate access to bank debt.”
Globally, the OECD report noted that weak demand indicates discouraged borrowers may in many cases have ceased to seek bank finance, while SME finance through alternative, non-bank instruments such as leasing, venture capital, factoring (the sale of accounts receivable), equity crowdfunding and peer-to-peer lending is not sufficiently developed.5
Meanwhile, banks’ SME loan portfolios are shifting from short-term to long-term lending, for reasons attributed to both lenders and borrowers. Banks may be emphasising long-term lending, which is usually more profitable, the OECD said. For their part, borrowers may be taking advantage of currently low interest rates to address long-term borrowing needs. Some may also be turning to other sources of short-term finance.
Banks vs. Alternatives
Among the debt, equity and asset-based finance options available, bank lending remains the predominant source of SMEs’ external finance. “Developing alternative financial instruments is especially important for those SMEs that still face difficulties in accessing bank finance,” the OECD’s Gurría said. “On the demand side, many entrepreneurs lack financial knowledge, strategic vision, and the resources to attract alternative finance instruments. On the supply side, potential investors are often dissuaded by the opacity of the SME finance market, a lack of investor-ready projects and limited exit options.”6
Among the alternatives, the use of leasing as a means of business finance increased in 2015, unlike in previous years, while factoring stagnated. Venture capital investments have not returned to pre-crisis levels. Equity crowdfunding and peer-to-peer lending were on the rise, but from a limited base. Some non-bank financial services companies also use new metrics for assessing creditworthiness, such as scores based on e-commerce transactions and other online activity, which could compare favourably to the collateral requirements of most banks.
Call to Action
In the run-up to the G20 Summit of world leaders in Hamburg in July 2017, a call to action on SME business finance has been delivered jointly by the B20 and Business at OECD lobbying groups. “Coordinated G20 action … is essential to support the financing of SMEs in global markets thereby fueling investment and growth,” they said.7
The groups delivered a detailed wish list for achieving three goals:
- Better coordination among governments to minimize cross-border policy inconsistences that increase compliance costs;
- An integrated financing approach between the private and public sector; and
- Digital platforms for a coordinated response to global challenges.
“The policy challenge is to find ways to channel more liquidity, current and future, towards entrepreneurial activity, especially to SMEs and innovative firms, without adding volatility effects on bank capital requirements,” the groups said.
Many governments provide credit guarantees as their primary support for SMEs, and some are also taking policy steps to stimulate the use of alternative financing, according to the OECD Scoreboard. Additionally, some are taking steps to spur SME internationalization and participation in global value chains, by facilitating export credit insurance, trade credit, innovative mixtures of private and public risk capital and other instruments of business finance.
The Scorecard itself aims to advance the design and evaluation of such policy measures, in part to increase SMEs’ resilience in uncertain economic times. “Through productive investments, the creation of new jobs and stronger innovation, SMEs can help bring about more sustainable and inclusive growth with broader benefits for our societies,” Gurría said.8
The Takeaway:
While SME lending is up and credit conditions are improving, many still struggle to access business finance, according to the OECD. Business groups are calling for more steps to accelerate SME finance, which dropped significantly during the global financial crisis.
Sources
- Presentation of the 2017 OECD SME Finance Scoreboard, Organization for Economic Co-operation and Development; http://www.oecd.org/industry/presentation-of-the-2017-oecd-sme-finance-scoreboard.htm
- Financing Sustainable Growth for SMEs Globally, B20 and Business at OECD; http://biac.org/wp-content/uploads/2017/04/Business-at-OECD-B20-Financing-Sustainable-Growth-for-SMEs-Globally3.pdf
- Financing SMEs and Entrepreneurs 2017, an OECD Scoreboard, Organization for Economic Co-operation and Development; http://www.oecd.org/industry/financing-smes-and-entrepreneurs-23065265.htm
- Financing SMEs and Entrepreneurs 2017, an OECD Scoreboard, Organization for Economic Co-operation and Development; http://www.oecd.org/industry/financing-smes-and-entrepreneurs-23065265.htm
- Financing SMEs and Entrepreneurs 2017, an OECD Scoreboard, Organization for Economic Co-operation and Development; http://www.oecd.org/industry/financing-smes-and-entrepreneurs-23065265.htm 6.Presentation of the 2017 OECD SME Finance Scoreboard, Organization for Economic Co-operation and Development; http://www.oecd.org/industry/presentation-of-the-2017-oecd-sme-finance-scoreboard.htm
- Financing Sustainable Growth for SMEs Globally, B20 and Business at OECD; http://biac.org/wp-content/uploads/2017/04/Business-at-OECD-B20-Financing-Sustainable-Growth-for-SMEs-Globally3.pdf
- Financing SMEs and Entrepreneurs 2017, an OECD Scoreboard, Organization for Economic Co-operation and Development; http://www.oecd.org/industry/financing-smes-and-entrepreneurs-23065265.htm
