Latin American Capital Markets

ACCESS TO FINANCING FOR SMALL AND MEDIUM ENTERPRISES 405tunity to the investment community. Once the business succeeds in attracting an investorit begins private negotiations with the potential investor. The negotiation isdone face-to-face, but the establishment of the market is online.BenefitsA notable aspect of the establishment of SME markets is the issue of competition withother sources of financing. Some exchanges face competition from private equityor other forms of financing available for SMEs, but at the same time, many exchangessee private equity as the seed round of financing. For the latter exchanges, the SMEmarket is either a funding option at a later funding stage or an actual exit strategy forprivate equity and thus complementary to other forms of financing. In fact, a wellfunctioningSME market helps exchanges, investors, the SMEs, and the economy inthe following ways (Schulman 1999):• SME markets serve as a breeding ground for new listing on the main market.• A wider range of equity investment vehicles helps establish better sectorstrategies and enhances investors' opportunities.• The economy benefits from the link that SME markets provide for the capitalflow from local and foreign investors into SMEs.According to Schulman's (1999) study, as perceived by exchanges, listing shares presentthe following advantages for SMEs:• Accelerate the future development of the company• Make it easier to attract and keep talented employees by making share optionincentives easier to implement• Ease tax burdens (in some countries, the inheritance of private companiescan often be a problem for families)• Diversify funding sources and thus provide financial flexibility• Improve the profile and commercial visibility of the company.Special CharacteristicsThe design of SME markets depends on several factors, such as the political and economicenvironment, available exchange systems, and the legal and regulatory frame-Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub