SMEs and Access to Finance
What are SMEs?
It has been a debate among businessmen and policymakers to get a specific definition of SMEs. It depends on: number of employees, size of invested capital and fixed capital, hence they have many different classifications.
SMEs and Economic Development
Although we could not reach a solid conclusion of their definition, we absolutely cannot deny their role in the economy. It is roughly estimated that SMEs in Egypt contribute to the Gross Domestic Product (GDP) by almost 80%. They are almost 90% of the industrial enterprises. SMEs are easily established and have various benefits to the economy and citizens alike, hence they provide employment and contribute to the country’s overall production.
Access to Finance
Although they have a huge impact on the economy, SMEs do not get enough attention from policymakers. They face a lot of problems regarding access to proper finance which is an essential milestone to start a business. One would think the SME community is well served when it comes to financing options, it is however challenging to find your way through, which is a subject we’re discussing in a session. Tune in to the Sessions section.
It is essential that SMEs would have an equal opportunity to fund their capital by both debt and equity. This way, SMEs would guarantee a more accurate decision making process.
In fact, most SMEs prefer to finance their businesses through equity rather than loans as they find difficulties dealing with bank regulations as well as finding it pricier to get loans. High interest rates and cost of credit are the main reason why SMEs do not rely on banks for financing their businesses.
On the other hand, banks do not have the full image about the nature of the SMEs activities, that is why they believe that financing larger businesses is less risky and have more access to reliable information.
Photo courtesy of york.ac.uk
Not having proper background on finance and management may be the most challenging problem facing most of the SMEs founders. They do not have the knowhow to establish a business. Hence, they cannot get access to finance. SMEs have some accounting systems; however, they are very basic that they cannot present proper statements to banks to get finance. They reduce SMEs’ abilities to meet the banks’ requirements for financing.
According to a survey conducted by the Central Bank of Egypt, 75% of the SMEs do not have business plans or proper feasibility studies. That lack of knowledge hinder their chances and abilities to obtain finance from some formal institutions.
Recommended Course of Action
Appropriate communication with financial institutions, not only venture capitalists, could bridge the gap between them and SMEs. Both financial institutions and SMEs should be more aware of what SMEs require and know more about their activities.
On the other hand, SMEs should work more on their accounting and financial systems. SMEs should make use of existing financial institutions that can help them prepare appropriate financial statements and also can offer them financial trainings.