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CIAO DATE: 4/5/2007
Financing SMEs and Entrepreneurs
November 2006
Abstract
Small and medium-sized enterprises (SMEs) are the backbone of all economies and are a key source of economic growth, dynamism and flexibility in advanced industrialised countries, as well as in emerging and developing economies. SMEs constitute the dominant form of business organisation, accounting for over 95% and up to 99% of enterprises depending on the country. They are responsible for between 60-70% net job creation in OECD countries. Small businesses are particularly important for bringing innovative products or techniques to the market.
Microsoft may be a software giant today, but it started off in typical SME fashion, as a dream developed by a young student with the help of family and friends. Only when Bill Gates and his colleagues had a saleable product were they able to take it to the marketplace and look for investment from more traditional sources.
While not every small business turns into a multinational, they all face the same issue in their early days – finding the money to enable them to start and build up the business and test their product or service.
Why is it harder for them to borrow money from banks or to find private investors than for larger firms? And why is it easier for small businesses to raise money in some countries than in others? These are important questions given the fact that small businesses, and particularly innovative SMEs, become increasingly vital to economic development and job creation as the knowledge-based economy develops.
This Policy Brief looks at the extent of the SME “financing gap”, and what governments can do to make it easier for them to obtain the funding they need to start, grow and prosper, and thus contribute to creating jobs and economic growth.
