Impact of Public Financing for SMEs: What do we know and what do we still have to learn?
While SMEs in Latin America and the European Union have a similar proportion of formal workers, their productivity in our region is lower; and this low productivity is related to a variety of factors—such as wages, international insertion and number of workers. Thus, the effective promotion of access to financing is key to boosting the growth of these companies (CAF, 2021).
Many countries have implemented several public productive financing policies in an effort mitigate market failures that limit access to credit for SMEs, including direct financing programs, supplier development programs, innovation support programs, rate subsidy programs, and guarantee facilities. Programs not only differ in terms of the type of funding, but also in their targeting, funding amounts, and the agency that manages them. Therefore, before designing and scaling up a financing policy for SMEs, we should know the impact that different programs have had (or haven’t had) in different countries of the region, as well as the concerns for which there are still no answers.
What do we know about the impact of public financing programs for SMEs in the region?
Results of impact evaluations of more than a dozen public financing programs for SMEs in six countries of the region helped identify three core lessons. First, such programs should target SMEs with the capacity to use funds effectively, but with credit constraints. Thus, we would seek to prevent companies without major restrictions on access to financing from capturing public monies with favorable conditions instead of other available sources of financing. This is particularly relevant when financing to SMEs plays a catalytic role to encourage the mobilization of funds from other financing mechanisms, and can contribute to the development of the private credit market, given that the beneficiary SMEs were able to access credit from other sources in subsequent periods. In other words: focusing the delivery of funds represents poses an important challenge in terms of identifying SMEs with greater potential and limited access to financing.
Second, the impact of public financing programs for SMEs can become differential depending on the size and age of the companies, and their industry. For example, there is evidence that Bancóldex’s subsidized loans in Colombia have had a positive impact on the investment levels of small companies (50 workers or less), but no in companies with 200 workers or more. In Argentina, however, the National Development Fund for Micro, Small and Medium Enterprises (FONAPyME), the Rate Bonus Regime (RBT) and the Reciprocal Guarantee Societies (SGR) had positive effects on exports in companies with 11 to 50 employees, in companies with 5 to 20 years of existence and in companies in the industrial sector (16.6%); but null in companies with 50 or more workers, in young (5 years or newer) or old (+20 years ) companies, and in companies in the agricultural sector.
Third, the design and governance of the institutions offering the funding are key to the functioning of the interventions and, consequently, it is also important to bear in mind the potential unintended effects of some of these policies. For example, companies could decide not to grow, for example, in terms of number of employees or capital stock to avoid losing the status of SMEs and continue to have access to financing with preferential conditions; or “banks may have incentives to assign riskier customers to guarantee programs or reduce their efforts to select the most appropriate debtors, relax lending criteria and oversight, which can also impinge on the repayment rate.”
In addition, the evidence also suggests the need to promote other services that can complement financial support. Although the study has not yet been published, it is worth noting that a recent evaluation of the Avanza Program—of the IDEAS Foundation—promoted by CAF showed promising results: The program includes diagnostic components of management practices, personalized and free advice, goal setting and work plans, and workshops, and has resulted in a survival rate of companies of 10 employees or more of 21% higher than that of similar companies in the control group. The results also showed that the survival rate of companies with fewer than 10 employees was not affected.
What do we still have to learn from public financing programs for SMEs in the region?
It is relevant to explore the impacts on companies that do not receive financing but belong to the productive chains of those that do, because by neglecting them, we can produce biased and imprecise analyses on the effects of the programs. Furthermore, there is little literature and evidence on the impacts of guarantee programs, and greater insight into these mechanisms would be very useful.
Lastly, it is not standard practice in business finance assessments to provide complete information on program costs, and thus, estimating profitability remains difficult. In this sense, it would be advisable to promote cost-effectiveness studies of the different financing programs for SMEs to be promoted.
