8. Conclusions
445. Broadening the finance options available and accessible to SMEs is a key challenge for policy
makers in the quest for fostering their development and sustaining the most dynamic enterprises, in a credit
constrained environment. It also represents a long-term challenge to improving the SMEs’ capital structure
and investment capacity, and reducing their over-reliance – and vulnerability – to the traditional lending
channels.
446. The OECD-wide project on New Approaches to Economic Challenges (NAEC), presented at the
OECD Ministerial Council Meeting in May 2014, underscores the need for the financial system to return to
fulfilling its essential role of intermediation and providing the necessary capital for productive activities
(OECD, 2014e). The present report provides an overview of alternative instruments for SME external
finance over the broad risk/return spectrum and suggests that there exist opportunities to tap increasingly
complex and interconnected financial markets to service the needs of a highly heterogeneous SME sector.
The report highlights an increasing range of financing options for the different needs of SMEs over their
life cycle, although some of these options are still at an early stage of development or, in their current
form, are accessible only to a small share of the SME population.
8.1. The range of instruments
447. Asset-based finance is a widespread form of finance for SMEs, to monetise the value of specific
assets and access working capital under more flexible terms than they could from conventional lending
channels. As firms obtain funding based on the value of specific assets, including accounts receivables,
inventory, machinery, equipment and real estate, rather than on their own credit standing, asset-based
finance can serve the needs of young and small firms that have difficulties in accessing traditional lending,
because they are informationally opaque, lack credit history or face temporarily shortfalls or losses.
448. In its long-established forms of factoring and leasing, asset-based finance is widely used across
OECD economies. In Europe especially, the relevance of these instruments for SMEs is on par with conventional bank lending, and the specific financial segment has grown steadily over the last decade, in
spite of repercussions of the global financial crisis on the supply side. Factoring and leasing are also
broadly diffused across emerging economies, and increasingly so in supply chain arrangements and crossborder activities. Their diffusion is favoured by less stringent requirements, in terms of an efficient legal
and judicial system, than traditional and asset-based lending.
449. Indeed, a weak legal environment can be an important constraint to the development of assetbased lending, which has mainly taken place in economies characterised by a solid framework for the
protection of secured interests and efficient bankruptcy laws. In fact, in countries where this form of
financing had already developed, its demand by SMEs has significantly increased in the aftermath of the
2008-09 global financial crisis, as awareness rose and access to other financing channels have become
more difficult, and also as a consequence of regulatory changes.
450. Alternative debt differs from traditional lending, in that investors in the capital market, rather
than banks, provide the financing for SMEs. These include “direct” tools for raising funds from investors
in the capital market, such as corporate bonds, and “indirect” tools, such as securitised debt and covered
bonds, whereby banks can access lower-cost funding on capital markets and extend SME lending.
451. Across OECD countries, the corporate bond instrument, which can serve the needs of mediumsized companies, providing an injection of liquidity to undertake investment and seize growth
opportunities, has had only limited diffusion in the SME sector. However, in the aftermath of the global
crisis, as other traditional financing sources dried up, the potential for a bond market for the larger segment
of the SME sector is starting to be recognised by entrepreneurs and investors. At the same time, this
remains an area in which lack of knowledge and awareness by entrepreneurs still represents a major barrier
to development.
452. In some countries, the regulatory framework allows private placements of corporate bonds by
unlisted companies, which are subject to less stringent reporting and credit rating requirements. However
lack of information on issuers, lack of standardised documentation, illiquid secondary markets and
differences in insolvency laws across industry players and jurisdictions currently limit the development of
these markets.
453. Debt securitisation and covered bonds are instruments for the refinancing of banks and for their
portfolio risk management, which have developed at a high pace in the past decade. However, in the wake
of the financial crisis, they have come under scrutiny and criticism, as one major driver of risk leveraging
and financial instability. Although it was not at the core of the financial turmoil, SME loan securitisation,
which had started to expand just before the crisis, came to a halt or decreased significantly, affected by
contagion in financial markets and in public perceptions. Over the last few years, however, it has attracted
renewed attention by policy makers and financial authorities, as an important instrument to foster SME
lending.
454. Crowdfunding has grown rapidly since the mid of the 2000s, and at an increasing rate over the
last few years, although it still represents a very minor share of business financing. While the pace of
technological developments has enabled a rapid diffusion of crowdfunding, the regulatory environment has
limited a broader adoption, especially for securities-based crowdfunding, which is still not legal in some
countries. Hence, in recent years, crowdfunding has been the object of important regulatory attention in
some OECD countries, which have aimed to ease the development of this financing channel, while
addressing concerns about transparency and protection of investors.
455. Hybrid instruments combine debt and equity features into a single financing vehicle. These
techniques represent an appealing form of finance for firms that are approaching a turning point in their life
cycle, when the risks and opportunities of the business are increasing, a capital injection is needed, but they
have limited or no access to debt financing or equity, or the owners do not want the dilution of control that
would accompany equity finance. This can be the case of young high-growth companies, established firms
with emerging growth opportunities, companies undergoing transitions or restructuring, as well as
companies seeking to strengthen their capital structures.
456. The development of hybrid instruments has been uneven across OECD countries and has mainly
concerned mid cap companies, with established and stable earning power and market position. In recent
years, with the support of public programmes, it has become increasingly possible to offer hybrid tools to
SMEs with lower credit ratings and smaller funding needs than what would be the practice in private
capital markets. Governments and international organisations mainly intervene through: i) participation in
the commercial market with investment funds that award mandates to private investments specialists; ii)
direct public financing to SMEs under programmes managed by public financial institutions; iii)
guarantees to private institutions that offer SMEs the financial facility and; iv) funding of private
investment companies at highly attractive terms.
457. Equity finance comprises all financial resources that are provided to the firms in return for an
ownership interest, including public instruments, whereby equity shares are traded in some form of stock
exchange, and private equity tools, which concern unlisted companies. Equity investors do not receive any
security from the investee company and their return is entirely determined by the success of the
entrepreneurial venture. At the same time equity investment implies that the entrepreneurs is willing to
dilute ownership and accept some degree of control on the business and, particularly in the case of private
equity, investors’ direct engagement in the management.
458. Equity markets are key for companies that seek long-term corporate investment, to sustain
innovation, value creation and growth. Equity financing is especially relevant for companies that have a
high risk-return profile, such as new, innovative and high growth firms. Seed and early stage equity finance
can boost firm creation and development, whereas other equity instruments, such as specialised platforms
for SME public listing, can provide financial resources for growth-oriented and innovative SMEs.
459. For decades, private market participants and officials have been seeking to encourage the
development of public SME equity markets. However,
since the late 1970s, a large number of SME
exchanges have been created which failed to attract sufficient companies for listing or to achieve sufficient
trading to maintain active markets. Difficulties include high listing and maintenance costs, administrative
and regulatory burden for SME, but also the lack of an equity cultural and inadequate management
practices in small businesses. On the investor side of the market, high monitoring costs relative to the level
of investment and low levels of liquidity act as an important deterrent to public investment in SME
equities. In addition, recent market practices that reduce economic incentives for intermediaries may have
inhibited the development of SME equities, which require constant support through marketing and capital
commitment.
460. In some countries, government policies mobilise retail investment to address the lack of liquidity
in SME equity markets and recent regulatory developments recognize that these platforms may require
specific regulation and infrastructure, such as looser listing and disclosure requirements and lower fees
than in the main market. In this regard,
a key challenge is to achieve a right balance between greater
flexibility and lower costs for SMEs and due diligence, to preserve market integrity, transparency and good
corporate governance.
461. Venture capital and angel investing are especially aimed at supporting pre-launch, launch and
early stage development phases, and typically target a small pool of high-growth potential companies, with
the capacity for high returns in a short time frame. The two forms are however characterized by different motivations, stage of investment, scale and operating models. Business angels invest their own money,
rather than collecting funds from a variety of investors, focus mainly on the seed and early stage, contrarily
to venture capitalists’ increasing focus on later stages, bring into the venture their own entrepreneurial
skills, expertise and networks, with a more hands-on role in the company than venture capitalists, invest
smaller amounts per deal, including in non-high-tech fields and in more dispersed areas than venture
capital funds. The two markets are however highly complementary. Business angels need a wellfunctioning VC market to provide the follow-on finance that some of the businesses they support will
require. At the same time, a well-developed angel market can create more investment opportunities and
increase the deal flows for VCs.
462. Across OECD and non-OECD countries, venture capital and angel investing have increased
substantially over the last decades, but were severely affected by the financial crisis, which has had the
effect of reducing exit opportunities for investors. In particular, the role of stock markets as a destination
for growth companies has decreased, as reflected in the falling number of Initial Public Offerings (IPOs),
especially in OECD economies. Indeed, a significant shift has been observed in fundraising through IPOs
in equity markets, across OECD economies and emerging economies.
463. In response, policy makers have placed increasing attention on these equity markets, as a way to
mobilise financial resources and entrepreneurial expertise towards innovative ventures. The policy mix has
been largely composed of supply-side measures, such as tax incentives,
direct investment and coinvestment, support to industry networks and associations, to increase visibility and scale and favour
match-making with entrepreneurs. To a lesser degree, policies target also training, mentoring and coaching
for investors. As in the case of other instruments, the demand side has received less policy attention and
resources, although countries are increasingly implementing measures that target the skills of existing or
would-be entrepreneurs.