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Wednesday, May 13, 2009

Small and Medium Enterprises need direct support!

Small and Medium sized enterprises (SME's) as well as Micro-enterprises, have not had it easy over the last few months. For one, they have been choked off from credit as have the larger firms and secondly, they are victims to a weak demand.

While the global credit crisis affects every one of us. The impact that it has on SME's and Micro-enterprises, .

For starters, SME's tend to employ a greater percentage of the population than larger firms do. In the USA, SME's employ over 80% of the total work force and in the EU, which employ’s 99% of their work force.

In the Latin American and Caribbean (LAC) region, the size of the SME's and micro-enterprise sector by firm works out to about 91% micro-enterprises with about 8% for SME's. But by work force, it's about 42% for micro-enterprises and and 27% for SME's.

This issue certainly becomes more complex and dire considering the size and scope. When magnified in a more global context, so-called "large" LAC companies can easily be classified as SME's by US and EU standards as do different size and standard classification hold between US and the EU. However, the impact they have on domestic LAC economies, are nonetheless vital.

To get back to the point, SME's and micro enterprises have a very hard pill to swallow in this economic crisis. The first of which is with the fact that they are not as involved with the informal sector financing as are their larger counterparts.

It's a particular trait of SME's to be unable to take advantage of the formal financing sector. From commercial bank's and, to a lesser extent, the capital markets, SME's, tend to not be in a position to qualify themselves to take advantage of formal modes of financing because they are, by the nature of their design, smaller, family owned firms that are not accountable to a board of directors or other external shareholders. In that sense, they tend to have very little standardized business infrastructure within their organization. This also means that in order to obtain financing for expansion, SME's have to rely on real estate equity, amassed savings or extended credit from other larger companies that they share business interests with.

Take for example a small fishing village with a cooperative in Peru. The co-op is made of individual fishermen from the village and they all have their own interests, as well as being a part of the larger cooperative. Because the individual fisher-folk have no formalized business structure in order to show a financial institution their savings capacity as well as their trends on income, the fishermen have to rely on- of all things- the exporters and other food based outlets in order to secure financing. This is also in addition to the need for the larger firms to provide financing in order to subsidize the individual fisher-folk’s production as well as to help sustain them in the weak or off seasons.

The larger concern with this is that the exporters or the larger companies that supported them in the past are also feeling the economic crunch at this present time. They are not as willing to support an extended employee, of sorts, during a time where they are losing value on the product they both depend upon as well as finding it difficult themselves to secure credit as well as finding markets to market that produce. All of this is with the misguided premise of the model that the financing of external fishermen by larger firms, was a sustainable business model to begin with. With larger supporting firms having to take profits to invest in an individual producer- in the hopes that his catch with be sufficient for all sides to make a sizable profit- it was an irregular business activity as done as ad-hoc as it was.

Another key issue has been the falling demand for goods and services from SME's. This, on top of scant access to formal financing, has stifled the progress of SME's and erased some of the gains they have made in the past 5-10 years.

Not only have SME's been losing a greater part of the market share. Potential start-ups are also reluctant to participate in a market, where the demand is weak in addition to consumers, choosing to go with an established dealer if they must spend their hard-earned money in order the gain maximum value and sound guarantees.

Regardless of the particular circumstances, we must move towards securing SME's under all conditions. This begins with understanding the real pressures and threats average folks, SME's and micro enterprises face at this time and then opening dialogue on doing something tangible about it.

A possible way to secure SME's now and for the future, can be in the form of a securitized market for inter-company lending.

If insured, regulated and administered by a market based entity of standing like the national Stock Exchange or a non-governmental board, this system will provide the sense of security and credibility within its financing and trading platform between the contracting companies as well as, at the same time, provide for a new financial product, in addition to inducing, at the base level, smaller firms into modernizing their business practices in order to be more transparent and accountable within their organization if they wish take part in an easier financing venture.

This will also nudge SME’s ever closer towards greater market inclusion and transparency, where they can take the next step into gaining value from the formal sector. As we have seen with the example with the fisher-folk in Peru, companies are already doing such financing and we can make it more relaxed than the formal commercial bank stircture, but slightly more secure than the arrangement the fihser-folk in Peru have.

Another way to ensure that SME's don't lose ground within the market, is in the form management training for SME principals.

While that idea sounds simple enough, the task to which we identify potential growth SME's to invest these training services in as well as provide an equitable and secure financing option as a final product, where SME's would feel comfortable that they would not lose their business to overwhelming formalized debt due to any particular market condition, is something that needs to be addressed.

While formalized debt obligations are risks in and of themselves, but if the gains are larger than the risks, then we can begin the process of formalizing SME's into higher and structured participation.

No doubt with the latter option, banks and other financing institutions must play a greater and more active in the SME's they wish finance. However, rudimentary free market fundamentals aside, with an additional insurance guarantee of the state, this business model for the bank's can be maximized using sound market intelligence on potential growth SME's and the markets they serve.

This does not suggest at all that subsidies for SME's in a downturn is the answer. On the contrary, this would move towards enhancing market based systems under an umbrella of government security, without providing the sub-optimal and wasteful blanket government subsidy program for all- the potential winners and the un-identified losers. A hyperactive market based micro-finance system is what is suggested, with insurance and assurances from the state, working in concert with market insurance providers and market leadership with inveterate probity.

Thinking for the future and forfending a developing market economy, is something, in this context, we can take into serious consideration for a healthy SME sector for the present and future in the LAC.

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