Latin American Capital Markets

ACCESS TO FINANCING FOR SMALL AND MEDIUM ENTERPRISES 395terprises and so stand in the way of financing the start-up or expansion of enterprises.Taxation can be a heavy burden on SMEs.Therefore, many governments are introducingtax relief or tax incentives for SMEs to encourage investment and research and development.Streamlining tax-related procedures is also essential.Sources of FinanceThe provision of venture capital is crucial to SMEs.The most influential regulations forthe development of venture capital or private equity markets are those of the governmentdetermining the type of investor eligible for funding venture capital funds andfirms. In some countries, pension funds, insurance companies, or other institutions arenot permitted to invest in venture capital because it could involve too high a risk forcertain classes of investors. Some countries have regulations regarding the liabilities ofparties to investment partnerships, which can result in discouraging institutional investingin venture capital funds. Although some of these regulations are useful andnecessary to avoid defaults, at the same time they can limit the supply of venture capitalfunding for SMEs.Accounting and disclosure requirements for obtaining finance can also beburdensome for SMEs, as financial institutions are often hampered by the lack of standardizationof accounting practices and lack of transparency. Governments should findan appropriate balance between investor protection and the interests of SMEs seekingfinance.In many cases, the underdevelopment of stock markets, particularly secondarymarkets for smaller firms, stands in the way of stock markets being the majorsource of SME financing. Registration and listing on stock markets are often too expensiveand complicated.The rules for stock exchange listing may require a minimumfirm size or age, a certain level of profits, or other enterprise characteristics, which areinappropriate for many SMEs.These regulations need to be tailored in a way that qualificationstandards for registration are more relaxed, registration procedures simplified,and new pricing methods in place.The banking sector remains a major source of financing for SMEs. In fact, becauseof inadequate venture capital resources and inaccessible stock markets, SMEsare often too dependent on bank financing. The lending practices of banks are influencedby the regulations of the financial sector However; in many cases, banks lack thecapacity to evaluate the long-term potential of SMEs or to assess the value of theirintangible assets. Banks may require additional collateral, which SMEs may not possess.Banks usually require long-term track records or a minimum level of profit or turnoverCopyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub