Lending to SMEs improving but demand for credit and financial knowledge remains weak, says OECD report

A new OECD report on SME financing in 39 countries around the world suggests that while lending to SMEs is improving, a stronger economic recovery is being held back in part by demand-side barriers – such as low demand for credit and small business people’s lack of financial knowledge.

The Organisation for Economic Co-operation and Development (OECD) report – “Financing SMEs and Entrepreneurs 2017: An OECD Scoreboard” – is now in its sixth edition.

lending to SMEs business woman doing finance on laptop pixabay 620822The report says that in nearly every country, the average interest rate charged for lending to SMEs in 2015 has fallen – in many cases to less than half the 2008 level. Image: pixabay-620822

It provides a comprehensive view across 39 countries of various aspects of financing for small and medium enterprises (SMEs), including lending to SMEs, debt, asset-based finance, equity, solvency, and government policies.

Although there are some variations, most of the countries in the scorecard define an SME as an independent (non-subsidiary) enterprise with fewer than 250 employees.

SMEs ‘engine’ of economic recovery

In presenting the latest issue of the scorecard in Washington D.C. recently, OECD Secretary-General Angel Gurría reiterates the important contribution that SMEs make to the global economy.

In the OECD area, SMEs account for 70 percent of jobs and generate 50-60 percent of value added. In this article, value added refers to the proportion of total gross domestic product.

“SMEs are an important engine to pull our economies out of the current low growth trap, revive productivity growth and reduce inequalities,” says Gurría, adding that:

“We need a comprehensive strategy for SME development, with policies that tackle both demand- and supply-side obstacles to expand the range of financing instruments available to SMEs and reduce their vulnerability to changes in credit markets.”

Key findings

The scorecard’s key findings (which cover the period up to and including 2015) include:

Lending to SMEs is improving on average although the situation is mixed. For example, in Spain, the volume of SME loans increased by 12.2 percent in 2015, following 6 consecutive years of decline. However, in developing nations, 2015 saw a deceleration in outstanding SME loans following the rapid growth of previous years.

Credit conditions easing but differences and concerns remain. In nearly every country, there was a fall in the average interest rate charged for lending to SMEs in 2015 – in many cases to less than half 2008 levels. However, in countries worst affected by the financial crisis, interest rates remain higher than the scoreboard average. Also, the gap between interest rates charged to SMEs and larger firms is widening and is bigger than it was before the crisis.

Payment delays to SMEs declining. Business to business payment delays fell further in 2015 in more than two-thirds of scorecard countries. In Portugal, where the average delay used to be 40 days before the crisis, in 2014 it was 33 days, and in 2015 it was 21 days.

SME bankruptcies have fallen in nearly two-thirds of the 39 scorecard countries, in many cases to below pre-crisis levels, reflecting a general improvement in SME economic environments.

Although improving, lending to SMEs is still held back, despite the more favourable conditions. In many developed nations – including the United States, France, Denmark, and the Netherlands – demand for credit has declined, especially at the very small end of the SME spectrum, the micro-enterprises that employ less than 10 people. One reason suggested is that owner managers have stopped seeking bank loans.

Non-banking sources of finance are up but not enough. 2015 saw a nearly 17 percent rise in leasing and hire purchasing – popular sources of finance for SMEs – compared with nearly 8 percent in 2014. Raising finance via equity crowdfunding and peer-to-peer lending are showing signs of increase, but in most countries, these are not really used much.

SMEs rely too heavily on ‘straight debt’

The report concludes that SMEs rely too heavily on “straight debt” which weakens their resilience to fluctuations in the credit market.

The report also suggests that too many small business people do not have sufficient financial knowledge, vision, and resources to make best use of alternative sources of finance.

On the supply side, the report suggests that potential investors are put off by the lack of clarity in SME finance markets. There are also too few investor-ready projects, and too few options for exiting. “Policy must tackle these issues in tandem in order to be effective,” Gurría urges, and adds:

“Developing alternative financial instruments is especially important for those SMEs that still face difficulties in accessing bank finance, in particular start-ups, young firms and very small enterprises.”

Video – BIAC Roundtable on SME Financing

The following video summarizes a 2016 meeting involving the Business and Industry Advisory Committee (BIAC) to the OECD, business leaders and senior government representatives on SME financing.

The meeting builds on the work done in 2105 by BIAC and the Turkish B20 and G20 Presidencies and makes recommendations for how best to support the financing of SMEs in global markets to drive investment and growth.