Targeted funding and partnerships are key to unlocking small business finance

Access to finance is critical to small business growth, but there is a dearth of financial solutions that meet the nuanced and diverse needs of various types of small enterprises. Governments, private sector, and global development partners are increasingly working together to fill the ever-growing gap which has been worsened by the COVID-19 pandemic. The post highlights the latest funding initiatives which demonstrate the value of partnerships in helping small businesses to access the funding they need to overcome hurdles that have plagued them for years.

Small businesses report significantly higher financing obstacles than large firms because they lack collateral and data used by banks to assess creditworthiness.

And when seeking credit, many micro and small businesses fall into the “missing middle” — too big for microfinance but too small for commercial banks — resulting in an inability to secure funds to grow through expansion, increase their working capital, and acquire assets. A 2018 World Bank study found that of a total of $8.9 trillion in potential demand for MSME finance, only $3.7 trillion is currently being supplied. Below, we outline some recent initiatives from the public and private sectors to better enable small businesses to access the finance they need.

Supporting SMEs to digitalize

Digitalization can help micro and small businesses overcome many of the constraints that hinder their growth, but many face several barriers in digital adoption, like skills gaps and a lack of finances to cover the costs of transformation.

While the COVID-19 pandemic heightened the importance of digitalization for SMEs, many small businesses lacked the capacity to adopt more sophisticated digital tools compared to larger firms.

Targeted policy interventions by governments can help SMEs adapt their workplace culture and processes to the digital world. Recently, some governments are stepping up their support for small business digitalization.

For example, the Canadian government has set aside about CAD $4 billion (USD 3.15) to help as many as 160,000 small businesses in the country digitalize their operations as a way to recover from the pandemic’s impacts. This funding, the government says, will help small businesses leverage e-commerce opportunities, upgrade or adopt digital technologies, and digitize their operations to stay competitive and meet their customers’ needs in the digital marketplace.

In Bosnia and Herzegovina, development partners are providing similar support. The European Bank for Reconstruction and Development in partnership with the European Union and GIZ launched a specialized credit line in the country for SMEs to access funding that allows them to invest in digitalization, automation, competitiveness, and green technologies.

Growth capital for small businesses in low-income countries

A blended impact investment vehicle — BUILD Fund, led by UNCDF and Bamboo Capital — pooled US$60 million from countries and development institutions to provide growth capital to small businesses who work in agriculture, renewable energy, and financial inclusion sectors in low-income countries. Besides funding, the businesses will also receive pre and post-investment business advisory support like enhancing the financial management, training in how to define and track social and environmental goals, and developing and documenting operational procedures and best practices, among others. Emerging evidence shows that combining financial and technical support to small businesses, and not just finance alone, can promote business growth.

Enabling women-led enterprises to grow

Women-led enterprises (WSMEs) represent around 35% of micro and small businesses in emerging markets and have an unmet financial need of between US$260 billion and US$320 billion a year. They continue to face mounting challenges due to rising prices, economic slowdown, conflict, and insecurity and were most affected by the pandemic as highlighted in our earlier spotlight. Recent support for them has come through the Women Entrepreneurs Finance Initiative (We-Fi), a multilateral partnership supporting women entrepreneurs in developing countries. We-Fi recently secured US$ 54.8 million for programs for over 60,000 women entrepreneurs that will address the various challenges that women entrepreneurs face while doing business. Five development partners will be involved in the implementation of various programs:

• The African Development Bank’s Africa Digital Financial Inclusion Facility will develop and extend digital financial services and skills-building for WSMEs in Cameroon, Egypt, Kenya, Mozambique, and Nigeria. By leveraging digital technology, the program will improve WSMEs’ access to finance and help reduce the gender financing gap.
• The Islamic Development Bank will provide financial literacy training, access to markets, matching grants, and access to finance from local banks to WSMEs in Yemen. It will also provide financial support to women entrepreneurs in Bangladesh engaged in sanitation-related businesses.
• The Inter-American Development Bank Group will facilitate relationships and transactions between WSMEs in Central America and capacity building, market linkage, and finance actors.
• The World Bank Group will strengthen the capacity of central banks, and other financial institutions, to better serve WSMEs, while aiming to promote the development of financial products and services for WSMEs, including digital financial products and access to early-stage finance. The program will potentially cover over 50 countries across the world.
• The IFC will run a program that deploys capital and blended finance instruments such as performance-based incentives, to promote innovative financial and non-financial services to women-led businesses and put in place a sex-disaggregated data initiative with 90 Financial Services Providers.

Collaboration that brings together expertise and resources across the private, public, and NGO sectors is necessary to drive small business growth, especially in the world’s developing economies where they provide 70% of jobs. The potential of these initiatives is immense and provides a good foundation on which more stakeholders can build. Ensuring that MSMEs can take advantage of digitalization, and at the same time, have access to financial products that meet their needs offers the best chance for economies to recover from the pandemic’s effects.