Facilitating SME access to finance for trade

  • 2013-11-07
  • By Torek Farhadi

Facilitating SME access to finance for trade

Constraints remain despite efforts by International Financial Institutions (IFIs)

The Global Competitiveness Report 2012-2013 by the World Economic Forum lists access to finance as the second or the third top constraint to SME growth in almost all developing countries.

Tremendous work has been done by our development partners (IFC, EBRD, AfDB and ADB) in providing enhanced liquidity to enable businesses to gain access to financing. But the challenge remains that all these provisions still do not reach SMEs as they cannot meet the bank underwriting conditions to access finance. In other words, in many cases banks have the possibility to lend, but they can’t find qualified borrowers.

A recent International Finance Corporation (IFC) study places SMEs’ financing gap in developing countries at $2 trillion. The report called “Closing the Credit Gap for Formal, Informal, Micro, Small and Medium Enterprises,” shows over 200 million formal and informal SMEs in developing countries do not have a loan or overdraft, or have a loan or overdraft but still find access to finance a constraint. A sizeable number of exporters or potential exporters fall into this category. On the other hand, on average, about two-thirds of full time jobs in developing economies are provided by small firms, therefore urgent action is essential in meeting their financial needs, supporting their growth.

ITC Activities in Access to Finance for SMEs

For the International Trade Centre (ITC), the support of job-creating SMEs, their growth and their entry in the multi-lateral trading system is paramount. Today, thanks to the progress in Information Communication Technology, trading across borders is only a matter of will for qualified SMEs. Through the Internet, an African SME can contact a client in northern Europe using the same steps as it does to contact a client next door in Africa itself.

Distances have shrunk and the opportunity of trading internationally needs to be made available to all SMEs which produce quality products. However, much capacity building is needed on how to conduct an international transaction and how to protect both transacting sides’ commercial interests, utilizing trade finance and trade facilitation tools.

The bigger picture, of course, is that the marketplace is much larger for SMEs today, including the international markets. To enhance overall economic development, state actors as well as international technical assistance organizations ought to partner with policy makers, trade support institutions and business coalitions to unleash this potential.

With regards to access to finance, rare are occasions where banks go to SMEs to give them financing. However, as a matter of public interest and because SMEs are job-creating entities, policy makers should have a deliberate approach in fostering inclusive SME growth according to their countries’ development priorities. Accordingly, ways and means need to be mobilized by policy makers to reach this objective and get the banks to reach out to SMEs. But which ways and means work and which ones don’t?

To support developing country policy makers, ITC studied the approaches of Canada, France, Germany and UK during the last two decades to draw lessons on what works in injecting liquidities into SMEs through banks and other entities. Most policy driven programs were plotted to ensure they create new economic activity in the geographic areas and economic sectors which are priority for the state. In other cases, to support innovation, special provisions for research and development and innovation were enacted into laws.

What are some state driven best practices facilitating access to finance for SMEs?

·         Venture Capital Financing (Canada)

·         Bridging the Skill Gap programs (Canada)

·         Drawing SMEs into service Networks (Finance, Trade Facilitation, Legal advice)

·         Special equity Funds for High tech start-ups

·         Risk sharing with partner institutions (Enterprise Europe Network-Access to Finance)

·         Early stage financing (German ‘SartGeld’ Programme)

·         Green initiative (support for energy efficiency projects)

·         Growth Accelerators, including access to finance and investors and Management advice (UK) and Start –up loan programs

·         Seed Enterprise Investment Scheme (UK). The program helps small early stage companies raise equity financing.

·         State support to SMEs through non-financial entities (state owned companies, regions, governorates) (France)

·         State support through banks to SMEs (France)

·         Plant and Equipment leasing programs

·         Mezzanine Equity Loan programs (Oséo, France)

·         Guarantee Programs (France): The success of the  Credit Guarantee Fund is due to many factors, including:


a)      A strong regulatory and supervisory system;

b)      An intensive publicity and promotional campaign launched by the government to explain the utility of the program. Additionally, training programs were provided to commercial banks to acclimate them with the Guarantee fund and its policies

·         Research and Development Tax Credits

·         TEBSME Academy(Turkey)

ITChas studied these programs and is adapting them on a case by case basis in various developing countries, responding to those states’ SME growth and support objectives.

ITCPartnering with Trade Support Institutions, banks and SMEs to produce bankable business plans

ITC has started to focus on building capacity of entrepreneurs on preparing better business plans as banks in developing countries indicate they would welcome support in identifying qualified long term borrowers with robust business strategies. Banks also indicate they have a preference in dealing with clients and entrepreneurs who have a better understanding of credit products. ITC steps in to prepare the potential borrowers to access bank credit, leasing as well as the specialized insurance products which support trade. Better prepared SMEs can then be matched with banks which have a better knowledge of their business, and the entire export value chain opportunities.

Through these trainings, ITC is building the managerial capacities of SMEs to maximize their chances of obtaining not only working capital and export financing but also successfully managing these credit instruments.  This knowledge allows them to present to potential lenders, crisp, realistic and bankable growth road maps for their businesses, standing on clear and achievable milestones. In other words, ITC is working on strengthening the project formulation expertise of these managers.

This program is also intended to help SMEs access finance from non-banking sources. For example, currently in many developing countries, especially in Africa the so-called ‘angel’ investors have come in to fund young entrepreneurs’ projects. These angel investors are looking for good projects.

ITCis stepping in to build capacity of potential young entrepreneurs to present financing plans to sources other than banks. Furthermore, the ‘angel’ investors also need technical support to evaluate financing requests. In fact the two go hand-in-hand and ITC’s Access to Finance program provides a framework of understanding between SMEs and financiers (be it banks or angel investors), under which projects can be evaluated for their strengths and weaknesses paving the way for increased access to finance for well-run small and medium sized businesses.

Torek Farhadi a  senior adviser in Access to Finance for SMEs for the International Trade Centre – ITC