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SMEs and Financing Challenges

SMEs and Financing Challenges

  • Irís Chivite Guimarães • Executive Head of the Small and Medium Companies Department at Vodacom

No moment is as decisive in the trajectory of a company as the first financing. It is almost like a certainty that the business will succeed, since the financing takes the form of a “certificate of confidence” from the entity that grants it. It is as if they were saying: “I believe that this company will succeed. Take the money and good luck!” But apparently, this trust is more easily extended to large companies, to the detriment of smaller ones. And that scenario is repeated in almost every market!

In practice, SMEs play a vital role in contributing to any country’s economy. They are responsible for creating new jobs, thus collaborating either to increase the employment rate or to reduce poverty, they contribute as a source of innovation activities, leveraging the development of entrepreneurial talent, besides being a force that makes the industrial structure more flexible, promoting a great dynamism to the economy.

So why is it so difficult for these companies to get funding?

Let’s look at the specific case of Mozambique and try to understand the reasons for this phenomenon that often, and ultimately, contributes to the extinction of the business.

In a market where, according to various studies, between 95% and 98% of registered companies are actually small companies, and considering that the importance of SMEs is reflected at the level of various indicators, such as employment and Gross Domestic Product, it is difficult, at first sight, to understand the barriers that are placed in the way of financing this segment.

Let us, together, analyse?

We would start by asking: what are the factors that affect the access to bank credit by SMEs? Some of those pointed out are:

  • Weak level of capitalisation of these companies;
  • The, sometimes, inconsistency of their activities;
  • A high exposure to debt;
  • Asymmetry of information;
  • The demands regarding capital ratios, and;
  • Tighter criteria in risk management.

All these factors, separately or together, have led banks to prefer to invest in large companies to the detriment of SMEs.

The initiatives of both banks and business development institutions to provide SMEs with knowledge on access to finance are commendable

A new company generally does not have the necessary self-financing to carry out its projects, so it is common for these companies to resort either to funding from family and friends or to credit institutions. When they decide for the latter option, the characteristics of their own segment turn against them: the low turnover and the lack of credit history for banks to analyse the risk. In this case, the credit institutions can only resort to an analysis of the investment project and the history of the owner of these companies. Thus a cycle is formed from which it is difficult for SMEs to escape. But then, how are companies in this segment supposed to survive?

The initiatives of both banks and institutions aimed at supporting business development, which aim to provide SMEs with knowledge about access to finance, business planning, financial solutions to support investment, among others, are praiseworthy.

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However, these initiatives seem to suffer from the fact that their ultimate purpose is to make SMEs qualified to the requirements of the LNG industry operators. What about all the other SMEs whose operations are not part of the value chain of the Oil & Gas players? Are they not also entitled to support for their development?

Under the Local Content Development Programme the role of anchor companies as facilitators in supporting SMEs through the bank-supplier confirmation loop is considered vital. But is this role being fulfilled in practice? Or are the SMEs themselves unaware of the circuits that facilitate their growth?

In this article we do not propose to bring answers, but to promote the debate around this subject. Thus, as a conclusion, we leave here some questions for reflection:

  • Is this difficulty in financing resulting from the fact that SMEs have “opaque information” that does not inspire confidence in banks?
  • Are banks unnecessarily burdening these companies with high interest rates and collateral requirements?
  • Is the much-needed state support for this segment failing in its purpose?
  • Are the SMEs neglecting certain steps that would contribute to their own development?

Best wishes for a good reflection!


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