Abstract
While small and medium-sized enterprises (SMEs) are important for economic growth and employment, they face numerous obstacles in accessing external finance. In this article, we review recent developments in the availability of financing for SMEs in Brazil, focusing on the greater use of equity and debt for SMEs. In assessing the barriers to external financing, we focus on the role of bank characteristics, market structure and variations of interest rate spreads across banks and time. Moreover, as banks retreat from SME financing, we examine the potential for SMEs to seek new sources of financing from private equity and venture capital funds. We examine the changes in the availability of bank loans between 2014 and 2016. By considering demand, we estimate the SME loan gap based on Central Bank and publicly available data. Our results show that the loan gap in Brazil is substantial. Finally, we show that the gap grew from 54.29% in 2014 to 87.5% in 2016.
Highlights
Enhancing access to financing for small and mid-size enterprises (SMEs) and entrepreneurs is a topic of much interest to policymakers and academics
As banks retreat from small and medium-sized enterprises (SMEs) financing, we focus on the potential for young and innovative firms to seek new sources of financing from private equity and venture capital (VC) funds
We investigate the challenges of SME financing in Brazil
Summary
Enhancing access to financing for small and mid-size enterprises (SMEs) and entrepreneurs is a topic of much interest to policymakers and academics. First loans to SMEs are continuing to decline in some developing countries and stagnating in countries most affected by the global financial crisis, such as the US, the UK and parts of the European Union (EU).1 The consequences of these trends can be observed in the estimated $5.2 trillion financing gap for SMEs in emerging markets.. We suggest that there are several ways that policymakers can improve the flow of debt and equity financing to SMEs. For example, recent work has pointed to enhancing competition in the supply of loans, making it easier for new (including foreign) capital to enter the market. International experience suggests that improved loan support and guarantees, as well as the promotion of non-bank financing channels, are likely to play an important role as alternative sources of financing for SMEs. The remainder of the paper is organized as follows.
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