Latin American Capital Markets

•CHAPTER 12Access to Financing for Smalland Medium EnterprisesHannesTakacsKinga KorcsmarosThe recent literature contains many accounts regarding the importance of small andmedium enterprises (SMEs) as a sector with significant potential for job creation, sparkingeconomic activities in emerging economies, and as a basis for entrepreneurship andinnovation. However, the literature is also replete with accounts of the significant constraintsthat affect the development of SMEs.The constraints are numerous and includefactors that are idiosyncratic to the nature of the enterprise and factors pertinent tothe environment in which they operate. Access to finance is one of the most significantfactors affecting the expansion of SMEs.Providers of finance, such as development banks, which are active in SME issues,consider access to funding an essential requirement for SMEs. Entrepreneurs alsomention the relevance of the lack of access to finance as a key problem that they encounterIn a recent study, SMEs in almost all European Union member countries wereasked to rank development constraints according to their importance. For most respondents,access to finance was among the three most important constraints.' Expertsalso indicated that the absolute importance of access to finance is negativelycorrelated with the size of the enterprise. Enterprises with I -9 employees rank thisconstraint higher than other constraints, compared with enterprises with 10-49 employees(European Observatory for SMEs 2000).This finding hints at the role of theunderlying growth cycle in the evolution of SMEs, where businesses usually start withtheir own resources, then graduate to a state where they become undercapitalized,and thus require additional funds. In developing countries, in particular, financing institutionsare usually unable to meet the needs of SMEs for seed money and investmentcapital. Problems of high transaction costs and perceived risks, lack of collateral andCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub1 Respondents highlighted the relevance of tax and legal issues as key factors affecting SME development