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APEC Symposium on SME Strategies to Manage the impact of the Global Financial Crisis

Chinese Taipei – June 8-9, 2009

SME FINANCING AT TIMES OF ECONOMIC RECESSION

Salvatore Zecchini

Institute for Industrial Promotion - Romeand

Chairman of the OECD WPSMEE Informal Steering Group on SME and Entrepreneurship Financing

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• SMEs, especially innovatives ones, are hit harder by the current global financial crisis than other firms.

• More vulnerable, because they involve higher risk and weaker financial structures.

• Still they deserve special attention, because they are essential for long-term economic growth.

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Focus of this presentation:

- Role of SMEs in economic growth

- Scale of the financial problem of SMEs

- Main stumbling blocks

- Solutions adopted in OECD countries and suggestions

5Source, OECD-Eurostat Entrepreneurship Indicators Program, “Measuring Entrepreneurship: a digest of indicators”, 2008

6Source, OECD-Eurostat Entrepreneurship Indicators Program, “Measuring Entrepreneurship: a digest of indicators”, 2008

7Source, OECD-Eurostat Entrepreneurship Indicators Program, “Measuring Entrepreneurship: a digest of indicators”, 2008

8Source, OECD-Eurostat Entrepreneurship Indicators Program, “Measuring Entrepreneurship: a digest of indicators”, 2008

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Number of enterprises by size, EU-27, 2002-2007

Source: First Section of the Annual Report on EU Small and Medium-sized Entreprises, EIM, Zoetermeer, January 12, 2009

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Value added and employment in the non-financial business economy in old (EU15) and new (EU-12)

Member States by size-class, 2007

Source: First Section of the Annual Report on EU Small and Medium-sized Entreprises, EIM, Zoetermeer, January 12, 2009

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Propensity to invest of SMEs by size class, EU-27, 2007

Source: First Section of the Annual Report on EU Small and Medium-sized Entreprises, EIM, Zoetermeer, January 12, 2009

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Sources of financing difficulties:

- Cash-flow problem and profit squeeze

- Credit rationing

- Reduction in fundraising for equity capital, seed capital , VC investment, private equity

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SMEs are currently caught in a bind:

On the one side, falling sales and slump in new orders;

On the other side, liquidity shortage, higher payment delays, tighter bank credit, drying up of equity capital sources.

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Leverage of the Italian manufacturing enterprises

Source: “Rapporto sulle tendenze nel sistema produttivo italiano”, Bank of Italy, November 2008

low low-middle high-middle high1983 55,9 52,1 56,3 59,1 53,01984 57,2 54,5 58,3 60,0 52,41985 55,4 55,1 54,8 58,3 50,01986 53,0 52,5 52,8 55,7 47,01987 52,1 52,9 53,3 53,0 45,31988 53,1 53,4 54,3 54,8 45,11989 53,8 55,0 54,7 55,4 45,01990 54,5 56,2 54,9 55,4 47,91991 53,1 54,0 52,8 56,3 45,51992 56,7 56,5 57,7 60,2 47,11993 57,5 55,9 63,1 59,4 48,51994 55,4 56,1 62,2 53,3 47,41995 55,1 56,7 61,1 53,3 45,81996 54,1 55,6 57,8 51,7 49,31997 53,7 56,3 52,4 52,3 52,71998 54,2 57,6 53,6 51,7 52,11999 53,2 56,5 52,2 51,8 49,62000 51,1 54,2 51,3 49,6 45,72001 52,3 54,8 51,9 52,1 47,42002 51,8 54,7 52,4 49,2 49,12003 51,0 54,0 50,8 48,4 49,32004 49,4 54,2 48,6 46,2 45,92005 47,6 51,4 47,4 45,0 43,72006 48,1 51,6 49,5 44,7 43,2

year TotalInnovation intensity by enterprise

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Short term debt on total financial debt in the Italian enterprises

< 250 251 - 500 501 - 1000 > 10001983 42,2 65,5 56,8 61,7 28,21984 47,5 66,3 63,5 59,5 34,51985 47,7 67,0 62,7 62,9 31,91986 48,6 66,5 63,3 61,2 32,31987 49,1 67,2 62,2 62,2 32,01988 52,3 68,7 64,1 61,6 34,91989 54,5 69,6 66,9 62,0 37,11990 55,9 70,5 66,8 66,6 36,71991 50,7 68,7 66,7 63,7 30,71992 52,0 68,8 66,8 64,3 33,01993 58,5 71,6 67,4 67,7 44,01994 56,2 72,0 64,1 65,9 38,01995 56,6 73,1 59,7 66,2 39,31996 63,8 70,7 56,6 55,1 60,71997 66,6 69,5 65,7 65,7 64,31998 65,0 69,7 64,3 60,0 60,41999 64,1 66,6 63,0 63,4 61,22000 66,3 67,8 65,2 62,9 65,32001 64,9 67,5 65,5 63,1 62,02002 65,3 68,1 66,5 65,5 61,82003 61,9 67,1 62,2 59,3 57,22004 55,1 62,7 63,6 55,5 46,22005 54,0 60,9 60,1 54,9 46,52006 56,8 67,2 56,9 52,4 48,2

year TotalEnterprise size by employers

Source: “Rapporto sulle tendenze nel sistema produttivo italiano”, Bank of Italy, November 2008

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Overview of Financial Markets

FTSE 350 stock mkt index

FTSE Small Cap Index Hang Seng stock mkt index

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CDS in Europe, Investment Grade, 5 years maturity - average

0

100

200

300

400

500

600

700

80002

/01/

2006

02/0

3/20

06

02/0

5/20

06

02/0

7/20

06

02/0

9/20

06

02/1

1/20

06

02/0

1/20

07

02/0

3/20

07

02/0

5/20

07

02/0

7/20

07

02/0

9/20

07

02/1

1/20

07

02/0

1/20

08

02/0

3/20

08

02/0

5/20

08

02/0

7/20

08

02/0

9/20

08

02/1

1/20

08

02/0

1/20

09

02/0

3/20

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CDS EU Auto - 5 years

CDS EU Industrial - 5 years

CDS EU Consumer - 5 years

CDS EU Energy - 5 years

CDS EU Financial Senior - 5 years

CDS EU Financial Subordinated - 5 years

CDS EU Telecomunication - 5 years

Source: Bloomberg

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The BALTIC INDEX

Source: Bloomberg Finance L.P. 2009

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Banks with tighter lending conditions

Source: EcoWin, in “Denmark National Bank”, Monetary Review, 4th Quarter 2008.

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Demand for credit in the US

Source: Federal Reserve, Senior Loan Officer Opinion Survey on Bank Lending Practices, released February 2, 2009

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• In view of declining sales expectations and uncertainties on the duration of recession, it is not surprising that SMEs curtailed their bank credit demand in most countries.

• But there is ample evidence that small businesses in all countries are finding it harder to borrow from banks. The tightening of bank loan conditions can be seen through several indicators, such as rising spreads, widening gaps between requested funds and granted amounts, higher collateral or guarantee requirements, longer delays in loan processing and higher lending fees.

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Impacts on SMEs (Cf. Table 1) SME demand for bank credit (Cf. Annex 2)

Demand Working capital & Payment

delays

Exits (Insolvencies and

bankruptcies)

Total Short-term

Long-term

OECD members Australia Inconclusive + Austria =

Belgium - - - + + = - - Canada - - + - +

Czech Republic = Denmark + + Finland - - + + + France + + - - -

Germany - = - - - Greece - - - + =

Hungary + - + - Ireland + + +

Italy - + + + - = - Japan - + Korea - + + -

Mexico - + Netherlands - + - -

New Zealand - - - + + - - Spain + + +

Switzerland = UK - - + + - - + - - -

USA - - - - - + - - - EC - - - - - - -

Non OECD members

Chile - Estonia =

Romania Russia

Slovenia = Thailand

Source: Country Reponses to the 14 January OECD WPSMEE Questionnaire on the Impact of the Global Crisis on SMEs and Entrepreneurship Financing and Credit reform Economic 2008/09.

Experienced or expected impacts of the crisis on SME and entrepreneurship financing

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In such an unfavourable lending environment, SMEs have to tap alternative funding sources,

such as self-financing, new equity, factoring, private equity, and venture capital.

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Global venture capital investment 2000-2008 in USD

0,00

1.000.000,00

2.000.000,00

3.000.000,00

4.000.000,00

5.000.000,00

6.000.000,00

7.000.000,00

8.000.000,00

2000 2001 2002 2003 2004 2005 2006 2007 2008

Mio

. US

$

Source: VentureXpert, 2009

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• Common concern of Governments at this juncture is to soften the recession impact on SMEs

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Source: OECD WPSMEE Questionnaire on the Impact of the Global Crisis on SMEs and Entrepreneurship Financing and publicly available information.

Policy responses A. Measures supporting sales, cash flows and

working capital (Annex 5)

B. Enhancing SME access to liquidity, especially to bank lending (Annex 6)

Alleviating working capital

shortage in the

economy

Reducing and easing

tax payments

Export facilitation

Easing procure-

ment payment

procedures

Creation and extension of

loan & guarantee schemes

Mediation and

monitoring

C. Strengthen-

ing pro-investment measures (Annex 6)

D. Strengthen-ing capital base and private

equity and venture capital

(Annex 7)

OECD

Australia Austria Belgium Mediator Canada

Czech Republic Denmark Finland France Mediator

Germany Greece Hungary

Italy Monitoring Japan Korea

Luxembourg Mexico

Netherlands New Zealand

Spain Switzerland

UK USA Monitoring EC

Non-OECD

Brazil Chile

Estonia Romania Russia

Slovenia Thailand

International Financial Institutions

EIB/EIF

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In the financing domain, the various measures can be grouped into three categories:

• working capital support;

• easier access to bank lending;

• help to maintain SMEs investment levels.

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Conclusions and Additional steps to be considered

To promote the availability and diffusion of timely information (more information on bank lending to small firms and medium-sized ones; to establish a “SME Financing Scoreboard ”)

Improve cash flow (accelerated depreciation, tax incentives, factoring, public procurement with attention to SMEs, support to R&D and innovative products)

Facilitate Access to credit (boost to credit guarantee programs, risk sharing with private lenders, credit mediators, and lending monitors)

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• To foster investment (by enhancing venture capital supply, improving vc exit mkts, increasing public equity funds)

• To promote business services and SME engagement in the design of relevant policies

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Above all measures, there is a need to provide strong macroeconomic support

to demand expansion