The has released the findings of two separate studies on the state of small business access to financing across 34 nations. Its twin reports did not uncover any earth-shattering revelations about the alternative finance in the world’s markets, instead coming to similar conclusions reached by separate researchers: Alternative financing is on the rise, but the market is too young to truly grasp cohesive trends for investors and small businesses.
But the lack of newsworthy findings were paired with another theme championed by the OECD: governments need to become more vigilant about collecting data about these emerging alternative financing trends if the world’s markets are to benefit at all from them.
The OECD’s two reports – the 409-page Financing SMEs and Entrepreneurs 2015: An OECD Scoreboard, and the 119-page New approaches to SME and entrepreneurship financing: Broadening the range of instruments – is largely aligned with similar, previous studies. Overall, the researchers conclude that while there is an uptick in economic progress in the wake of the 2007/2008 financial crisis, and while alternative lending has gained traction on the market, as a whole, small business lending has not entirely reached levels seen before the recession.
The reports offer a mix of both positive and negative outlooks for the markets. For instance, the Scoreboard notes that throughout 2013 and 2014, governments across the globe made significant efforts to boost SMEs’ access to financing through initiatives that offer tax breaks to innovative SMEs or support of venture capital investments. For the majority of the surveyed jurisdictions, payment delays and bankruptcies among the SME community are no longer rising.
On the other hand, the study found that venture capitalists are not investing the same volume of funding into SMEs as seen before 2007. Across Europe, the paper noted, access to financing seems to be easier for larger companies than it is for smaller enterprises. Both papers found that traditional banks, by a wide margin, remain the more popular source of financing for SMEs.
Despite more than 600 pages of the combined reports, OECD researchers frequently echo words of caution: There is insufficient data to draw formidable conclusions about the true state of alternative finance and SME lending in today’s market.
Part of this warning stems from the fact that not all of the same data is available for all nations surveyed. With the data that is available, there is a clear picture regarding which nations’ SMEs can more reliably access financing. For example, Austria is on the positive end of the spectrum, reporting some of the lowest SME loan rejection rates in 2013 when compared against the 13 nations for which this type of data was available. Seed funding and investment by venture capitalists in Austria has surpassed levels seen in 2008, making it one of only a few nations to see this type of growth. Between April and September of 2014, just 7 percent of Austrian SMEs reported access to finance as their main concern.
That compares with Greece, found on the negative end of the SME financing spectrum. A whopping 32 percent of SMEs in Greece reported access to finance as their main concern between April and September of 2014. Nearly the same percentage of loans that were granted to SMEs in Greece in 2013 were non-performing.
The research does present a clear picture: nations hit hardest by the 2007-2008 financial crisis are struggling the most to recover small business lending levels.
But the OECD also warns that a lack of data and the varying stages of economic recovery seen among these nations prohibit accurate cross-country analysis of SME financial trends. Among the biggest gaps that prevent cross-country analysis is the varying definitions between jurisdictions of what constitutes an SME.
“The biggest challenge to comparability remains the lack of harmonization in the statistical definition of an SME, which continues to prove difficult due to the different economic, social and political concerns of individual countries in their approach to SMEs,” authors of the Scoreboard wrote.
The OECD encourages governments to increase their data collection processes within the alternative small business lending markets, as doing so, the group said, will not only improve the ability to analyze global trends in alternative finance, but will also lead to greater SME funding.
For governments, the OECD recommended several steps officials can take to improve their data collection that the authors consider “necessary” to facilitate cross-country analysis of SME financing. Those steps include the further adoption of a standardized table for SME financing data, a more transparent way to offer more comprehensive information on government small business lending programs, and the increased collection and publication of data on non-performing SME loans. Officials should also collect more data on small business loan fees and interest rates as well as statistics on businesses applying for and accessing non-bank financing.
As new approaches to SME and entrepreneurship financing highlights, this type of data collection is also crucial to increasing small businesses’ access to working capital. Lenders are increasingly using technology and data analysis to assess loan risks, whether it be the hard data of transaction lending, or the qualitative data and relationship analysis of relationship lending.
But despite this increase in the use of data, the OECD found that, despite the growing relevance of alternative finance for SMEs, evidence and data around the use of these financial tools is “patchy,” at best. The market needs to fill in these information gaps if the world wants to see a cohesive improvement in SME financing. “Addressing information asymmetries and increasing transparency in the markets are other priorities to boost the development of alternative financing instruments for SMEs,” the report concluded. Doing so, the authors wrote, not only reduces risk for lenders, but can decrease borrowing costs for SMEs.
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