New Approaches to SME and Entrepreneurship Financing
Broadening the Range of Instruments
Bank lending is the most common source of external finance for many SMEs and entrepreneurs, yet has proven challenging to newer, innovative and fast growing companies, as well as to those undertaking important transitions in their activities or seeking to de-leverage and improve their capital structures.
This report maps a broad range of external financing techniques to address diverse needs in varying circumstances, including asset-based finance, alternative debt, hybrid instruments, and equity instruments. It further highlights key enabling factors for their development, discusses major market trends and obstacles to SME uptake, and suggests some key areas of policy action to overcome challenges to market development.
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Hybrid finance instruments for SMEs
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.
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