Less Access to Funds Troubles SMEs in G20
Why are entrepreneurs so critical for a global economic recovery but continue to face challenges in accessing funding across the world?
A new white paper, Funding the Future, released by Ernst & Young to coincide with the G20 Young Entrepreneur Summit 2012 (G20 YES) in Mexico, analyses this question.
Among the more than 1,000 entrepreneurs that were surveyed for the report across the G20, almost two-thirds say that they find access to finance difficult in their country. Despite intervention by a number of G20 governments, bank lending remains difficult to obtain, particularly in the early stages of SMEs growth.
The entrepreneurs also indicate that risk aversion among institutional and other investors has made it more difficult to obtain equity finance. Additionally, regulatory initiatives aimed at strengthening the financial system can exacerbate their challenges.
Access to funding continues to be one of the most significant challenges for the creation, growth and survival of SMEs, particularly innovative ones. Despite being key engines of economic growth; accounting for 50% of employment in most G20 countries, SMEs attract just a tiny proportion of overall investment.
Overall investment in SMEs across the G20 stands at US$714b, 6% of the total US$11,507b for all forms of investment. By far the biggest share of this comes from bank lending at US$569b. By individual countries, China dominates with investment in SMEs of just over US$400b, of which US$385b is bank lending. The US follows at around US$116b. Funding in many G20 countries is dominated by bank lending, although the US stands out as offering a more diverse range of debt and equity finance mechanisms.
Maria Pinelli, Global Vice-Chair for Strategic Growth Markets at Ernst & Young explains why entrepreneurs are so important for economic development: “At a time when many developed economies are facing a weak economic outlook, the importance of nurturing entrepreneurial ventures is greater than ever. High-growth entrepreneurial companies will play a particularly important role in this rebalancing of the economy. Their rapid rate of expansion means that they have greater potential to create jobs at a time when many G20 countries are facing stubbornly high rates of unemployment.
“While SME’s create 50% of employment in most G20 countries, they only receive 6% of investment. Clearly, there is an imbalance here. How many more jobs could be created with more support? With just a few changes, by 2020 the financial system could support double the number of SMEs it does today.”
It is not just in developed markets as Maria comments: “Entrepreneurship is also vital to the future of rapid-growth markets. Although many of these economies have enjoyed high rates of GDP growth for the past decade, their strong performance has often depended on low-cost exports, a commodity price boom and large scale investment in infrastructure.
“In the coming years, these markets must rebalance their economies towards greater domestic consumption, import demand and higher-value business activity. The creation of an environment in which entrepreneurship can flourish will be an important step in achieving these objectives.”
Improving access to finance
So what is the overall funding picture for entrepreneurs and how could more be done to enable better access?
Business angels are becoming a more important source of finance for promising start-ups. Access to finance at the seed and pre-seed stages remains extremely challenging. Credit guarantee schemes have emerged as an important way of keeping bank lending windows open. Corporate venturing could re-emerge as a powerful complement to traditional venture capital funding.
In developed markets, regulatory change could help to unblock IPO markets
In rapid-growth markets, private equity is becoming a viable financing option for smaller entrepreneurial businesses. Governments should consider policies that target entrepreneurs with the greatest impact – too often the potential impact of an idea is spread too thinly, according to Ernst & Young.
As Maria explains: “Across every G20 country, a crucial factor that will determine the success of entrepreneurship is access to finance. Without the ability to secure funding, entrepreneurial companies will be unable to reach their growth potential and may not survive at all.”
The aim of the Summit and the G20 YES program is to highlight the importance of entrepreneurship. But without access to funding all the efforts made by bodies like G20 YES and governments around the world could go to waste.
Concludes Maria: “Although some of the key findings that access to funding especially at an early stage are discouraging, there were many interesting recommendations in the report which will make interesting debating points at the G20 YES event in Mexico and are certainly worthy of wider consideration. With just a few regulatory changes, we could double the amount of SME’s we support.”