Information about Sme Finance
The economic and social importance of the Small and medium enterprise (SME) sector is well recognized in academic literature.[1] It is also recognised that these actors in the economy are underserved, largely in terms of finance.[2] This has led to significant debate on methods to serve this sector.
Although there have been numerous schemes and programmes in markedly different economic environments, SME finance can be summarised by two main approaches.[3]
These are:
There have been two approaches to overcome the SME finance gap.
The first is to broaden the collateral based approach by encouraging collateral based lenders to finance SMEs with insuffcient collateral. This is largely done through an external party providing the collateral or guarantee. Unfortunately, this method has seldom been based on free market principles and has largely been unsustainable.
The second has been to broaden the viability based approach. Since the viability based approach is concerned with the business itself, the approach is to provide business development assistance[4] to reduce risk and increase returns. This is driven through the detailed review and assistance with the business plan.
A supplemental feature to the viability based approach is to provide appropriate finance that is tailored to the cash flows of the SME.
Although the returns generated by this approach will never be attractive to the venture capitalist, they can be significantly better than collateral based lending, whilst at the same time providing a lower risk profile than the venture capitalist. Some stakeholders are emphasising this approach because it provides a sustainable approach to social benefits,[5] while other stakeholders are developing their capacity in this area in order to generate sustainable returns for shareholders, investors, employees and clients.
In the past, a significant barrier to this approach has been the information gap required to understand the viability, and the transference cost required to provide business development assistance. This has largely been overcome in the last several years due to improved communications technology, allowing for easier and cheaper access to information resources.
As technology and information sharing continues to improve, this second approach will become increasingly cost effective and attractive to a financiers with a viability based approach, or consultants adept at providing business development assistance to SMEs.
This gap, with higher profitability than traditional SME finance, and lower risk than traditional venture capital, has been increasingly called the Growth finance sector.
Although there have been numerous schemes and programmes in markedly different economic environments, SME finance can be summarised by two main approaches.[3]
These are:
- Collateral based lending is offered by traditional banks and finance companies, made up of a combination of the following:
- Asset-based finance
- Contribution based finance
- Factoring based finance, using reliable debtors or contracts
- Information based lending
- Financial statement lending
- Credit scoring
- Relationship lending
- Viability based finance is offered by venture capital
SME Finance Gap
A substantial portion of the SME sector does not have sufficient collateral required for collateral based lending, and does not have high enough returns to justify the risks taken by venture capitalists. In addition, many markets have little or unreliable information, limiting the effectiveness of financial statement lending and credit scoring. This has led to the SME finance gap. The finance gap is particularly pronounced in emerging economies.There have been two approaches to overcome the SME finance gap.
The first is to broaden the collateral based approach by encouraging collateral based lenders to finance SMEs with insuffcient collateral. This is largely done through an external party providing the collateral or guarantee. Unfortunately, this method has seldom been based on free market principles and has largely been unsustainable.
The second has been to broaden the viability based approach. Since the viability based approach is concerned with the business itself, the approach is to provide business development assistance[4] to reduce risk and increase returns. This is driven through the detailed review and assistance with the business plan.
A supplemental feature to the viability based approach is to provide appropriate finance that is tailored to the cash flows of the SME.
Although the returns generated by this approach will never be attractive to the venture capitalist, they can be significantly better than collateral based lending, whilst at the same time providing a lower risk profile than the venture capitalist. Some stakeholders are emphasising this approach because it provides a sustainable approach to social benefits,[5] while other stakeholders are developing their capacity in this area in order to generate sustainable returns for shareholders, investors, employees and clients.
In the past, a significant barrier to this approach has been the information gap required to understand the viability, and the transference cost required to provide business development assistance. This has largely been overcome in the last several years due to improved communications technology, allowing for easier and cheaper access to information resources.
As technology and information sharing continues to improve, this second approach will become increasingly cost effective and attractive to a financiers with a viability based approach, or consultants adept at providing business development assistance to SMEs.
This gap, with higher profitability than traditional SME finance, and lower risk than traditional venture capital, has been increasingly called the Growth finance sector.
References
1. ^ UN/ECE Secretariat. SMEs - Their role in foreign trade. www.unece.org. United Nations Economic Commission for Europe (UN/ECE). Retrieved on 2007-06-28.
2. ^ OECD-APEC Keynote Paper on Removing Barriers to SME Access to International Markets. www.oecd.org. OECD (2006). Retrieved on 2007-06-28.
3. ^ Adapted from: Berger, A.; G. Udell (2004). A More Complete Conceptual Framework for SME Finance.
4. ^ Kamanyi, Judy (2003). Poverty Reduction Strategy Paper, Development Assitance, Gender and Enterprise Development Impact Assessment: The Case of Uganda (PDF). Retrieved on 2007-06-28.
5. ^ Hoffman, Kurt; Chris West, Karen Westley, Sharna Jarvis (March 2005). Social impact model Enterprise Solutions to Poverty. Shell Foundation. Retrieved on 2007-06-28.
2. ^ OECD-APEC Keynote Paper on Removing Barriers to SME Access to International Markets. www.oecd.org. OECD (2006). Retrieved on 2007-06-28.
3. ^ Adapted from: Berger, A.; G. Udell (2004). A More Complete Conceptual Framework for SME Finance.
4. ^ Kamanyi, Judy (2003). Poverty Reduction Strategy Paper, Development Assitance, Gender and Enterprise Development Impact Assessment: The Case of Uganda (PDF). Retrieved on 2007-06-28.
5. ^ Hoffman, Kurt; Chris West, Karen Westley, Sharna Jarvis (March 2005). Social impact model Enterprise Solutions to Poverty. Shell Foundation. Retrieved on 2007-06-28.
External links
Small and medium enterprises or SMEs, also called small and medium-sized enterprises and small and medium-sized businesses or small and medium businesses or SMBs are companies whose headcount or turnover falls below certain limits.
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Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects.
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Collateral may refer to:
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- Collateral (finance) in finance means a security or guarantee (usually an asset) pledged for the repayment of a loan if one cannot procure enough funds to repay. Also can be an exchange for voting rights.
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In the simplest meaning, asset-based lending is any kind of lending secured by an asset. This means, if the loan is not repayed, the asset is taken. In this sense, a mortgage is an example of an asset-backed loan.
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Factoring is often used synonymously with accounts receivable financing. Factoring is a form of commercial finance whereby a business sells its accounts receivable (in the form of invoices) at a discount.
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credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person, which is the likelihood that the person will pay his or her debts in a timely manner.
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Venture capital is a type of private equity capital typically provided by professional, outside investors to new, growth businesses. Generally made as cash in exchange for shares in the investee company, venture capital investments are usually high risk, but offer the potential
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Libertarianism
Schools of thought
Agorism
Anarcho-capitalism
Geolibertarianism
Green libertarianism
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Left-libertarianism
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Schools of thought
Agorism
Anarcho-capitalism
Geolibertarianism
Green libertarianism
Right-libertarianism
Left-libertarianism
Minarchism
Neolibertarianism
Paleolibertarianism
Progressive libertarianism
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business plan is a formal statement of a set of business goals, the reasons why they are believed attainable, and the plan for reaching those goals. It may also contain background information about the organization or team attempting to reach those goals.
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The United Nations Economic Commission for Europe (UNECE or ECE) was established in 1947 to encourage economic cooperation among its member States. It is one of five regional commissions under the administrative direction of United Nations headquarters.
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The Organisation for Economic Co-operation and Development (OECD), (in French: Organisation de coopération et de développement économiques; OCDE) is an international organisation of thirty countries that accept the principles of representative democracy and a free
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