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The Organization of Economic Cooperation and Development (OECD) routinely conducts extensive surveys into global financing activity for SMEs and entrepreneurs. While bank lending is the #1 most common source of external financing, the recent global financial crisis has put a damper on bank lending as the go-to solution for entrepreneurs. SMEs require lines of credit for several reasons, including investment purposes, start-up costs, and cash flow.
The global economy has witnessed a tapering of traditional bank lending in the 10 years since the financial crisis erupted. There are growing concerns however that credit tightening is going to prove detrimental to SMEs, and banks are spearheading this initiative. For this reason, the OECD posits that more non-bank financial institutions need to provide financing to SMEs.
The value of small and medium enterprises in the broader economy cannot be overstated. This is especially true in emerging market economies which are heavily reliant on these businesses for GDP growth and development. Small businesses are at the core of capitalism, economic growth and development. They are net contributors to the economic well-being of their country, and the broader global economy.
Various forms of financing have emerged over the years, notably asset-based financing where banks and non-bank lenders will offer secured loans to their clientele. This may be in the form of physical assets (land, machinery, vehicles, equipment, inventory) or accounts receivable. Asset-based financing is traditionally used in emerging market economies and developed economies. It is the safest way for banks to make loans to businesses without taking on too much uncertainty.
How much does small business contribute to the global economy?
The World Bank estimates that SMEs (Small and Medium Enterprises) dominate the scene in terms of their contribution to economic growth. In emerging market economies, the World Bank estimates that 40% of GDP (gross domestic product) is provided by way of small businesses. Further, SMEs generate 60% of all employment activity in emerging market countries. Such is the burgeoning demand for the global workforce in these countries that some 600 million jobs will be required by 2032.
Most jobs in sub-Saharan Africa and across Asia are provided by SMEs. There is currently a credit gap (a deficit) among formal Small and Medium Enterprises valued at $1.2 trillion. When we take informal SMEs into account, this figure more than doubles to $2.6 trillion. There is no doubt that SMEs are the drivers of economic growth in emerging market economies, and developed economies alike.
European Stats for SMEs – Economic Growth and Employment Data
In Europe, some notable statistical findings were made about SMEs and their contribution to economic growth and prosperity. In fact, a full 99% of all business activity in Europe takes place via SMEs. SMEs are different to large enterprises for many reasons. For starters, SMEs are generally considered to be the main drivers of economic growth. SMEs are less affected by international trade than they are by regional and national conditions.
Perhaps the most important reason why SMEs are so valuable is the employment prospects they bring to the table. While many economists focus on measures like GVA, the importance of employment prospects cannot be understated. Across Europe, SMEs make up some 67% of total employment. The countries with the highest percentages are Greece at 86%, the UK at 53% and 57% across the European Union.
Australian SMEs Seek Easier Lines of Credit
Given that SMEs are such a critical component of global economic growth, employment and GDP, it makes sense that companies are now investing in SMEs. Banks may be tightening the screws on credit approvals, but there are many non-bank entities and other financial institutions eager to secure lines of credit for small businesses.
There is significant growth in this regard with the small business lending market in Australia. There are many benefits to alternative small business loans versus traditional bank loans. One of the most pressing concerns for SMEs down under is the bureaucratic red tape that banks impose upon borrowers. Banks are becoming increasingly strict when it comes to approving SME loans, and they often want mounds of data to justify their decision to loan money.
Banks also do not provide clear repayment terms and conditions, and they oftentimes want to secure their loans with assets. Many non-bank lenders have stepped in to make it easier for SMEs to receive unsecured loans, short-term loans and expedited loans. There is tremendous value when using these credit facilities, since they can mean the difference between an SME prospering or going belly up.