Financing SMEs and Entrepreneurs 2024

PARIS - Since 2020, the global economy has been hit by a series of shocks, with strong impacts on small and medium-sized enterprises (SMEs) and entrepreneurs and their access to finance. The COVID-19 crisis, and Russia’s war of aggression against Ukraine, sparked a surge in inflation. SMEs have been particularly impacted, as they have limited ability to pass increased costs onto customers without losing competitiveness. As they traditionally rely on debt to finance operations and investment, SMEs have also been hit hard by the corresponding steep increases in policy interest rates in most countries and the tighter lending environment.

Financing SMEs and Entrepreneurs 2024:

An OECD Scoreboard shows that 2022 marked a sharp increase in the cost of SME financing, unprecedented in the history of the exercise. This, along with an increase in the share of SMEs requiring collateral for loans, deterred many SMEs from seeking debt finance, weighing down on new lending and the outstanding stock of SME loans. Equity finance also fell sharply as investors turned towards fixed-return asset classes, driving down start-up valuations and affecting VC fundraising. Leasing activities fell too, although less severely than after the pandemic, but factoring activities saw marked growth.

Given the critical role SMEs play in driving resilient, sustainable and inclusive growth, governments around the world have been taking measures to support SME access to finance, including through actions to support diversifying financial sources and instruments to meet the different needs of all types of SMEs and entrepreneurs. Both policy makers and financial actors are placing increasing attention on accelerating the green transition of SMEs, including through the development and expansion of sustainability-linked and green loans, credit guarantees, equity and grants.

However, SMEs continue to face challenges in tapping into the large pool of sustainable finance, in part due to their limited ability to provide sustainability performance data, which are increasingly required by financial institutions and supply-chain partners.

In 2022, the cost of SME financing increased sharply

In 2022, Central Banks around the world tightened monetary policy in response to rising inflationary pressures. The increase in policy interest rates was transmitted almost one-to-one to the real economy, including corporate and SME interest rates, with the Scoreboard median of SME interest rates rising by 1.1 percentage points. This was not only the steepest annual increase in the Scoreboard’s history (Figure 1), but because the increase was relative to a long period of historically low rates, the marginal impact of the increase was even more stark.

All country groups followed this trend. High interest rates and the overall tightening of lending conditions contributed to an increase in the share of SMEs requiring collateral by 1.17 p.p. in 2022. Although core inflation is expected to continue to ease in 2024, monetary policy continues to be restrictive with an unwinding of high interest rates expected to be gradual, weighing on the recovery of SME lending, at least in the near term.

For more information, visit: https://www.oecd.org/cfe/smes/Policy_Highlights_2024%20Financing%20SMEs%20Scoreboard%20FOR%20WEB%20FINAL.pdf?utm_campaign=SME%20Scoreboard%20Thematic&utm_content=Read%20the%20Policy%20Highlights&utm_term=cfe&utm_medium=email&utm_source=Adestra