1. Bank lending is the most common source of external finance for many SMEs and entrepreneurs,
which are often heavily reliant on traditional debt to fulfill their start-up, cash flow and investment needs.
While it is commonly used by small businesses, however, traditional bank finance poses challenges to
SMEs, in particular to newer, innovative and fast growing companies, with a higher risk-return profile.
2. Capital gaps also exist for companies undertaking important transitions in their activities, such as
ownership and control changes, as well as for SMEs seeking to de-leverage and improve their capital
structures. The long-standing need to strengthen capital structures and to decrease dependence on
borrowing has become more urgent, as many firms were obliged to increase leverage in order to survive
the recent economic and financial crisis. Indeed, the problem of SME over-leveraging may have been
exacerbated by policy responses to the crisis, which tended to focus on mechanisms that enabled firms to
increase their debt (e.g. direct lending, loan guarantees). At the same time, banks in many OECD countries
have been contracting their balance sheets in order to meet more rigorous prudential rules.
3. While bank financing will continue to be crucial for the SME sector, there is a broad concern that
credit constraints will simply become “the new normal” for SMEs and entrepreneurs. It is therefore
necessary to broaden the range of financing instruments available to SMEs and entrepreneurs, in order to
enable them to continue to play their role in investment, growth, innovation and employment.
4. The OECD Working Party on SMEs and Entrepreneurship (WPSMEE) project on “New
approaches to SME and entrepreneurship finance: broadening the range of instruments” aims to help
broaden the finance options available to SMEs and entrepreneurs, by improving understanding about the
full range of financing instruments they can access in varying circumstances, and by encouraging
discussion among stakeholders about new approaches and innovative policies for SME and
entrepreneurship financing. It contributes to the OECD-wide project on New Approaches to Economic
Challenges (NAEC).
5. The present report maps the main features of a broad range of external financing techniques
alternative to straight debt, including “asset-based finance”, “alternative debt”, “hybrid instruments”, and
“equity instruments”. It details the financing modalities, profile of eligible firms, enabling factors, trends
and policies for tools within these categories.
The analysis highlights the different degrees of uptake by
SMEs of these instruments and the potential for broader usage by certain categories of firms.
6. Across OECD countries, and increasingly also in emerging economies, asset-based finance is
widely used by SMEs, for their working capital needs, to support domestic and international trade, and,
partly, for investment purposes. In Europe especially, the prevalence of these instruments for SMEs is on
par with conventional bank lending, and the specific financial segment has grown steadily over the last
decade, in spite of repercussions of the global financial crisis on the supply side.
7. Through asset-based finance, firms obtain funding based on the value of specific assets, including
accounts receivables, inventory, machinery, equipment and real estate, rather than on their own credit
standing. In this way, it can serve the needs of young and small firms that have difficulties in accessing
traditional lending. Asset-based lending, which provides more flexible terms than collateralised traditional
lending, has also been expanding in recent years, in countries with sophisticated and efficient legal systems
and advanced financial expertise and services.
8. Policies to promote asset-based finance relate primarily to the regulatory framework, which is
key to enable the use of a broad set of assets to secure loans. Across OECD countries, active policies exist to support asset-based finance for businesses that are unable to meet credit standards associated with longterm credit. In particular, factoring has been supported as a means to ease SMEs’ access to trade finance
and promote their inclusion in value chains.
9. While asset-based finance is a widely used tool in the SME financing landscape, alternative
forms of debt have had only limited usage by the SME sector, even within the larger size segment which
would be suited for structured finance and could benefit from accessing capital markets, to invest and seize
growth opportunities. In fact, alternative debt differs from traditional lending in that investors in the capital
market, rather than banks, provide the financing for SMEs. To foster the development of a corporate bond
market for SMEs, mainly mid-caps, policy makers have especially targeted transparency and protection
rules for investors, to favour greater participation and liquidity. Recent programmes have also encouraged
the creation of SME trading venues and the participation by unlisted and smaller companies. In some
countries, public entities participate with private investors to funds that target the SME bond market, with
the aim of stimulating its development.
10. In some countries, the regulatory framework allows private placements of corporate bonds by
unlisted companies, which are subject to less stringent reporting and credit rating requirements. However
lack of information on issuers and of standardised documentation, illiquid secondary markets and
differences in insolvency laws across industry players and jurisdictions currently limit the development of
these markets.
11. Debt securitisation and covered bonds, which also rely on capital markets, had increased at high
rates before the global crisis, as an instrument for refinancing of banks and for their portfolio risk
management. However, in the wake of the crisis, these instruments came under increasing scrutiny and
criticism, and markets plummeted. The post-crisis deleveraging in the banking sector, however, has
contributed to reviving the debate about the need for an efficient – and transparent – securitisation market
to extend SME lending. In recent years, new measures have been introduced at supra-national and national
level to re-launch the securitisation markets and some countries have lifted the limitations that did not
permit SME loans as an asset class in covered bonds.
12. Crowdfunding has grown rapidly since the middle of the 2000s, and at an increasing rate in the
last few years, although it still represents a very minor share of financing for businesses. One specificity of
this instrument is that it serves to finance specific projects rather than an enterprise. It has been used in
particular by non-profit organisations and the entertainment industry, where non-monetary benefits or an
enhanced community experience represent important motivations for donors and investors. Nevertheless,
over time, crowdfunding has become an alternative source of funding across many other sectors, and it is
increasingly used to support a wide range of for-profit activities and businesses.
13. Donations, rewards and pre-selling represent the most widespread forms of crowdfunding and
constitute an important share of the funding raised by private companies through this channel, providing
also non-financial benefits to companies and investors. While these forms currently lead the industry,
lending and equity based crowdfunding are expected to play an increasing role in the future. Peer-to-peer
lending can be attractive for small businesses that lack collateral or a credit history to access traditional
bank lending. Equity crowdfunding can provide a complement or substitute for seed financing for
entrepreneurial ventures and start-ups that have difficulties in raising capital from traditional sources.
14. While the pace of technological developments has enabled a rapid diffusion of crowdfunding, the
regulatory environment has limited the expansion of its use, especially for securities-based crowdfunding,
which is still not legal in some countries. Hence, in recent years, crowdfunding has received close attention
by regulators in some OECD countries, which have aimed to ease the development of this financing
channel, while addressing concerns about transparency and protection of investors.
15. The market for hybrid instruments, which combine debt and equity features into a single
financing vehicle, has developed unevenly in OECD countries, but has recently attracted interest of policy
makers across the board. These techniques represent an appealing form of finance for firms that are
approaching a turning point in their life cycle, when the risks and opportunities of the business are
increasing, a capital injection is needed, but they have limited or no access to debt financing or equity, or
the owners do not want the dilution of control that would accompany equity finance. This can be the case
of young high-growth companies, established firms with emerging growth opportunities, companies
undergoing transitions or restructuring, as well as companies seeking to strengthen their capital structures.
At the same time, these techniques are not well-suited for many SMEs, as they require a well-established
and stable earning power and market position, and demand a certain level of financial skills.
16. In recent years, with the support of public programmes, it has become increasingly possible to
offer hybrid tools to SMEs with lower credit ratings and smaller funding needs than what would be the
practice in private capital markets. Governments and international organisations mainly intervene through:
i) participation in the commercial market with investment funds that award mandates to private
investments specialists; ii) direct public financing to SMEs under programmes managed by public financial
institutions; iii) guarantees to private institutions that offer SMEs the financial facility and; iv) funding of
private investment companies at highly attractive terms.
17. Equity finance is key for companies that seek long-term corporate investment, to sustain
innovation, value creation and growth. Equity financing is especially relevant for companies that have a
high risk-return profile, such as new, innovative and high growth firms. Seed and early stage equity finance
can boost firm creation and development, whereas other equity instruments, such as specialised platforms
for SME public listing, can provide financial resources for growth-oriented and innovative SMEs.
18. Since the late 1970s, a large number of SME public equity markets (or “new markets”) have been
created. However, most of these exchanges failed to attract sufficient companies for listing or to achieve
sufficient trading to maintain active markets. Difficulties include high listing and maintenance costs,
administrative and regulatory burden for SME, but also the lack of an equity cultural and inadequate
management practices in small businesses. On the investor side of the market, high monitoring costs
relative to the level of investment and low levels of liquidity act as an important deterrent. In addition, the
recent evolution in trading practices has reduced economic incentives for intermediaries, which play an
important role in ensuring liquidity and support to SME listings.
19. In some countries, to address the lack of liquidity, government policies favour retail investment
or reduced taxation on security transactions. Recent regulatory approaches recognize that these platforms
may require specific regulation and infrastructure. SME listings benefit in most cases from looser listing
and disclosure requirements and lower fees than in the main market. However, a key challenge is to
achieve a right balance between greater flexibility and lower costs for SMEs and due diligence, to preserve
market integrity, transparency and good corporate governance.
20. Across OECD and non-OECD countries, private equity investments have developed substantially
over the last decades. This has partly offset the recent stagnation in public markets, although, following the
global financial crisis, exit options have become more challenging also for private equity investors. Buyout
is the prevalent form of investment in private equity markets and concerns SMEs only to a limited degree,
although interest in upper-tier SMEs has increased in recent years, as investors look for yields and
diversification within their portfolios. On the other hand, venture capital and angel investing have been
providing new financing opportunities for innovative, high growth potential start-ups, mainly, though not
exclusively, in high-tech fields. Their role has been increasing over the last decade, as the industry has
become more formalised and organised, including through syndicates, associations and networks.
21. Venture capital funds and business angels are characterised by different motivations, targets,
scale and operating models, but are highly complementary in the financing continuum for early stage firms.
Business angels need a well-functioning VC market to provide the follow-on finance that some of the
businesses they support will require. At the same time, a well-developed angel market can create more
investment opportunities and increase the deal flows for VCs.
22. Policy makers have placed increasing attention on these equity markets, as a way to mobilise
financial resources and entrepreneurial expertise towards innovative ventures. The policy mix has been
largely composed of supply-side measures, such as tax incentives, direct investment and co-investment,
support to industry networks and associations, to increase visibility and scale and favour match-making
with entrepreneurs. To a lesser degree, policies also target training, mentoring and coaching for investors.
As in the case of other instruments, the demand side has received less policy attention and resources,
although countries are increasingly implementing measures that target the skills of existing or would-be
entrepreneurs.
23. 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.
24. First, the limited awareness and understanding about alternative instruments on the part of startups and SMEs has slowed the development of these markets. It is not only a matter of increasing
knowledge about individual instruments, but also of supporting SMEs in developing strategic vision and
planning. There is a need to understand how different instruments can serve different financing needs at
specific stages of the life cycle, the advantages and risks implied, the complementarities and opportunities
for leveraging between some of these sources.
25. It is also necessary to improve the quality of start-up 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, in some countries, an increasing concern about the lack of entrepreneurial skills and
capabilities and low quality of investment projects is driving more attention to the demand side, such as
training and mentoring.
26. The regulatory framework is a key enabler for the development of instruments that imply a
greater risk for investors than traditional debt finance. However, designing and implementing effective
regulation, which balances financial stability, investors’ protection and the opening of new financing
channels for SMEs, represents a challenge for policy makers and regulatory authorities. This is especially
the case in light of 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. Recent regulatory initiatives, which aim at making the financial sector safer, are perceived to be
unduly onerous by some investors, who are also affected by the enduring uncertainty arising from expected
regulatory revisions.
27. 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.
28. In some countries, policies have been put in place to address the information gap between SMEs
and potential investors by facilitating their direct interaction. These initiatives have different degrees of
public engagement, from awareness campaigns to brokerage and match-making, In some cases, however,
public 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.
29. For some hybrid or equity instruments, policy makers have also intervened to kick-start the offer
for SMEs, or extend it to lower-tier SMEs. 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 growthoriented enterprises. As a result, the public share of funding in some higher risk segments has significantly
increased. A key challenge now is to ensure long-term sustainability by leveraging private resources and
developing appropriate risk-sharing mechanisms with private partners.
30. 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 is a challenge which also needs to
consider the heterogeneity of the SME sector in the process of policy design. Micro data and micro level
analysis are essential to improve understanding about the different needs of SMEs and the potential for
new business models emerging in the financial sector to respond to these needs.
31. Policy makers have placed increasing attention on these financial markets, as a way to mobilise
financial resources and entrepreneurial expertise towards innovative ventures. The policy mix has been
largely composed of supply-side measures, such as tax incentives, direct investment and co-investment,
support to industry networks and associations, to increase visibility and scale and favour match-making
with entrepreneurs. To a lesser degree, policies target also training, mentoring and coaching for investors.
The demand-side has received less policy attention and resources, but an increasing concern about the lack
of entrepreneurial skills and capabilities and low quality of investment projects is driving actions that target
the skills of existing or would-be entrepreneurs. This is all the more important in the light of the limited
awareness and understanding about alternative instruments on the part of start-ups and SMEs.
32. In spite of their growing importance for financiers and SMEs, the evidence about the use of these
various tools by SMEs, and how they respond to their needs, remains patchy. In order to enrich the
mapping presented in this report, case studies on specific instruments, i.e. crowdfunding, securitisation,
covered bonds, corporate bonds and private placements, have been conducted2
. The analytical work aims
to improve understanding about market structure and dynamics, regulatory frameworks, drivers and
constraints on the supply and demand sides, effectiveness in servicing SMEs under varying circumstances,
rationale for policy intervention and evaluation of policy experiences.
33. Key findings from the present mapping exercise and the case studies are incorporated in a
synthesis report, which contributes to the OECD initiative on New Approaches to Economic Challenges
(NAEC)3
.