8.2. Key challenges and policy implications
464. Across the range of instruments analysed, the report underlines common obstacles for the SME
sector to fully reap the benefits of a more diversified financial offer. For policy makers and stakeholders,
addressing these challenges is crucial if the increasingly complex financial system is to serve the needs of
the real economy.
465. First, SME skills and strategic vision are a key ingredient to any effort to broaden the range of
financing instruments. The limited awareness and understanding about alternative instruments on the part
of start-ups and SMEs have limited the development of these markets.
It is not only a matter of increasing
knowledge about individual instruments, but also supporting SMEs in developing a long-term strategic
approach to business financing, that is, understanding how different instruments can serve their different
financing needs at specific stages of the life cycle, the different advantages and risks implied, and the
complementarities and possibility to leverage these sources.
466. It is also necessary to improve the quality of start-ups’ business plans and SME investment
projects, especially for the development of the riskier segment of the market. In many countries, a major
impediment to the development of equity finance for young and small businesses is the lack of “investorready” companies. Furthermore, SMEs are generally ill-equipped to deal with investor due diligence
requirements. Indeed, an increasing concern about the lack of entrepreneurial skills and capabilities and
low quality of investment projects is driving more policy attention to the demand side, although supplyside policies are still prevalent. This includes measures such as training and mentoring..
467. The regulatory framework is a key enabler for the development of instruments that imply a
greater risk for investors than traditional debt finance, from asset-based finance to equity financing. Thus,
designing and implementing effective regulation, which balances financial stability, investors’ protection
and the opening of new financing channels for SMEs, represents a crucial challenge for policy makers and
regulatory authorities. This is especially the case given the rapid evolution in the market, resulting from
technological changes as well as the engineering of products that, in a low interest environment, respond to
the appetite for high yields by financiers. New financing models are emerging that may engage relatively
inexperienced investors, such as in the case of crowdfunding, or in which the misalignment of incentives
may place at risk the stability of the system, which is made more vulnerable to risk by an increased
interconnectedness of financial markets.
468. Securitisation is a case in point in this regard. Recent regulatory initiatives address pitfalls
brought to the fore during the global financial crisis, such as the misalignment of interests between
originators and investors and of regulatory capital with credit risk, as well as the lack of due diligence by
investors. However, regulatory reforms intended to make the financial sector safer are perceived to be
unduly onerous by many investors, who are withdrawing from the market. Also, the lasting uncertainty
arising from expected regulatory revisions creates disincentives to investors and hampers the re-launch of
the market (OECD, 2014a). Certainty is part of a sound regulatory framework for investors.
469. Also, efforts should be made to foster the wider use of public equity for SMEs,
which is
currently held back by high costs, regulatory burdens, lack of liquidity and trading practices that create
disincentives for intermediaries. The right balance between administrative and regulatory burden and due
diligence needs to be achieved, so that the flexibility provided to SMEs does not compromise investor
protection, integrity of market participants, corporate governance or transparency. It is important for policy
makers to incentivise capital market participants to take a longer-term approach, and offer additional
services to growth-oriented entrepreneurs. Creating the right ecosystem for public equity for SMEs will
also support the development of other, non-traditional SME equity instruments such as equity private
placements, equity crowdfunding, listed funds (with potential co-funding and risk sharing between the
private and public sectors), and corporate venturing.
470. Addressing information asymmetries and increasing transparency in the markets are other
priorities to boost the development of alternative financing instruments for SMEs. Information
infrastructures for credit risk assessment, such as credit bureaux or registries or data warehouses with loanlevel granularity, can reduce the risk perceived by investors when approaching SME finance and help them
identify investment opportunities. Reducing the perceived risk by investors may also help reduce the
financing costs which are typically higher for SMEs than for large firms. The higher risks and costs stem
from the large heterogeneity and opacity of the SME sector, with entrepreneurs often less prone, willing or
able to share risk-sensitive information (OECD, 2006; OECD 2014a).
471. In some countries, policies seek to address the information gap between SMEs and potential
investors by facilitating their direct interaction, with different degrees of public engagement, from
awareness campaigns to brokerage and match-making. In the business angel market, for instance, public
action has largely aimed at improving information flows and networking opportunities between financiers
and entrepreneurs. In some cases, however, the facilitation efforts have not produced the desired results,
due to the lack of maturity of local markets, i.e. little scale or lack of investor-ready companies. This
further highlights the need for a policy mix that takes into account existing limitations on both the supply
and the demand side.
472. For some hybrid or equity instruments, policy makers also face the challenge of kick-starting the
offer for SMEs, or extending it to SMEs with lower credit ratings and smaller financial needs than those
usually served by private investors, while ensuring long-term sustainability. In the aftermath of the global
financial crisis, as private investors withdrew from some market segments, public policies have also aimed
at sustaining these markets, with governments stepping in to fill, at least in part, the financing gap for innovative or growth-oriented enterprises. As a result, the public share of funding in these higher risk
segments has significantly increased.
A key challenge now is to leverage private resources and develop
appropriate risk-sharing mechanisms with private partners.
473. In spite of their growing importance for financiers and SMEs, evidence on the use of these
various tools by SMEs, and how they respond to their needs, is currently patchy. The lack of hard data on
non-debt financing instruments represents an important limitation for the design, implementation and
assessment of policies in this area. This limitation is particularly critical when seeking to take account of
SME heterogeneity in the process of policy design. Micro data and micro level analysis are essential to
improve understanding about the different needs of the SMEs sector and may help to better understand the
potential and challenges of new business models emerging in the financial sector.
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