The pressing need to enhance the role of small and medium-size enterprises (SMEs) and entrepreneurs as drivers of innovation, job creation and growth is increasingly recognised by governments as they pursue efforts to put the global economy back on track. This means addressing both cyclical constraints and structural barriers. Access to finance represents a longstanding hurdle to entrepreneurship and SME growth, which was exacerbated by the global financial and economic crisis. Bank lending to SMEs and credit conditions have still not recovered to pre-crisis levels in many countries, and evidence suggests that credit restrictions for SMEs are likely to persist for the foreseeable future.

Bank lending is the most common source of external finance for many SMEs and entrepreneurs, which are often heavily reliant on traditional debt to fulfil their start-up, cash flow and investment needs. However, traditional bank finance poses challenges to SMEs, in particular to newer, innovative and fast growing companies, with a higher risk-return profile. Capital gaps also exist for companies undertaking important transitions in their activities, as well as for SMEs seeking to de-leverage and improve their capital structures. Yet, for most enterprises, there are a few alternatives to traditional debt.

This chapter presents key findings and policy implications from the study. It discusses the new reality in SME finance, with changing conditions in bank lending and limitations to financing for new, innovative and fast-growing companies. It highlights the need to broaden the range of financial instruments for SMEs and entrepreneurs and illustrates the range of options available across the risk-return spectrum, including asset-based finance, alternative debt, hybrid tools and equity instruments. It briefly illustrates the main features of these instruments and comments on recent trends and policies to support their development across OECD and non-OECD countries. It concludes by discussing common obstacles to the SME sector to fully reap the benefits of a more diversified financial offer and suggests some key areas of policy action.

This chapter provides the rationale for the study and illustrates the objective and structure of the report. It describes traditional lending technologies and related credit-risk mitigation techniques. It comments on their limitations for financing young and small firms and for sustaining long-term investment and growth. It discusses how financing instruments alternative to straight debt alter the traditional risk-sharing mechanism and proposes a categorization of these instruments across the risk/return spectrum, i.e. by differing degrees of risk and return.

This chapter describes the functioning of asset-based finance, which includes asset-based lending, factoring, purchase-order finance, warehouse receipts and leasing, and comments on how it can serve diverse SME financing needs in varying circumstances. The chapter compares the functioning mechanisms of the different asset-based tools, comments on the profile of firms that are suited for each one of them, and discusses the key enabling factors for their development. It then illustrates trends in asset-based finance across world regions and provides examples of regulatory reforms and policy programmes to support the development of asset-based financing for SMEs.

This chapter illustrates alternative forms of debt for SMEs, which appeal to investors in the capital market. The chapter covers “direct” tools for raising funds from investors in the capital market, such as corporate bonds, and “indirect” tools, such as securitised debt and covered bonds, which can be used by banks to transform SME loans in their balance sheets into liquid assets, and thus increase lending itself. The chapter provides details about the functioning of the different instruments, key enabling factors for their development, the profile of firms that are suited for corporate bonds, recent trends in alternative debt markets and policies to strengthen their development.

This chapter illustrates the emergence of crowdfunding as a means to finance businesses and discusses its potential for financing SME investments. The chapter comments on the origin of crowdfunding and describes its different forms. It illustrates the profile of investments and business models that are suited for crowdfunding, it discusses the key factors that enable the development of crowdfunding activities, it describes recent trends in the crowdfunding industry, and it presents recent regulatory reforms and policies that are intended to ease the development of this financing channel, for both debt and equity funding.

This chapter describes the functioning and development of hybrid finance instruments, which combine features of both debt and equity into a single financing vehicle. Hybrid instruments include: subordinated debt (loans or bonds); participating loans; silent participation; convertible debt and warrants, and; mezzanine finance, which combines two or more of these instruments within a facility. The chapter discusses the profile of firms that are suited for hybrid financial tools and the pre-conditions for the investment. It highlights the key enabling factors for the development of a commercial market for hybrid instruments, which typically concerns larger SMEs in need of substantial capital injection, and comments on mechanisms to facilitate the downsizing of this type of finance and access by lower-tier SMEs. It illustrates recent market trends and typologies of policy intervention to sustain the development of mezzanine finance and ease access to hybrid instruments by lower-tier SMEs.

This chapter describes typologies of equity financing for SMEs, the profile of firms and the business stage that are suited for the different equity instruments, key enabling factors for their development, recent market trends and policies to boost equity investments in new and small companies. The chapter discusses private equity finance, focusing on and comparing venture capital and angel investments, and public equity, in the form of specialised platforms for public listing of SMEs.

Incentives that are proportional to an investment’s capital gains, including capital gains tax provisions, rollover and carry-forward of gains or losses. See also Front-end incentives.