Access to financing for micro, small, and medium entrepreneurs continues to face obstacles and difficulties. This scenario becomes even more evident when we refer to the situation of the African continent, where the financial system still shows tendencies that do not favor the productive sector. Under the Envolver project, which aims to promote the development of a sustainable and inclusive private sector, based on the diversification and availability of financial services adapted to MSMEs and entrepreneurs, a diagnostic study was developed to map the financial products currently available to micro, small, and medium enterprises. This study allows us to outline a set of recommendations for innovative financial solutions adjusted to this audience, based on examples of success in contexts similar to Angola.
TopGeneral Conditions For Msme Access To Financing
Access to financing by MSMEs is a topic that has been studied for several decades. This is because, although these companies always represent a large part of the business context in most countries, due to their characteristics, they usually have difficulties in obtaining financing for their activity, in terms of amounts, maturity and costs, which conditions their development and the evolution of social progress and the growth of world economies.
In 2003, the report of the European Observatory for SMEs (small and medium enterprises) prepared by the European Commission, considered access to finance as one of the main constraints to the development of SMEs, which became more pronounced the smaller the size of the companies. Therefore, bank credit was the main external source of financing, and the only one for many companies. However, most of the time the financing was obtained in insufficient amounts, at high costs and with short maturities.
For the development of financial support measures for SMEs, the report stated that their heterogeneity should be considered. Thus, it defined four types of companies:
Start-ups had greater difficulties, and as well as bank credit, it was common to get financing through friends and family. They also resorted to business angels who also provided commercial, entrepreneurial, and management know-how.
Maturing companies obtained cheaper financing because they offered more equity and asset guarantees.
Innovative and growing firms were better able to access capital than SMEs in general. However, because of uncertainty about the future, their sources of financing were heavily based on business angels and venture capital. Traditional financial institutions demanded more real guarantees from companies of this type.
In 2006, in a document on the constraints for access to financing by Portuguese SMEs, IAPMEI mentioned that there were aspects to consider both on the supply and demand side.
Table 1. | Constraints on the Supply of Financing |
• Reduced number of potential financiers, which deprives companies of negotiating power;
• High costs of risk analysis and administrative processing of operations, which are more easily monetized in larger projects hinders the financing of innovative projects;
• High level of sophistication of credit risk analysis criteria for companies;
• Primacy of real guarantees;
• Reduced liquidity of capital markets, giving precedence to large companies;
• Deficient coordination with proximity agents, such as venture capital companies or business angels. |
| Financing Demand Constraints |
• Lack of perceived quality of the financial information produced and disclosed;
• Difficulty in sharing market or business information, which hinders credit risk analysis;
• Weak financial culture and reduced scale, with difficulty in negotiating capacity as a consequence;
• Difficulties in providing guarantees, particularly in the initial phase of activity;
• Excessive concentration of capital and resistance to opening new partners;
• Lack of entrepreneurial culture and investment in skills with high added value (quality, innovation, customization of supply, etc.). |
Source: Authors