Issues in SME Financing

Financing Technology Entrepreneurs and SMEs in Developing Countries: Challenges and Opportunities

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Excerpted from infoDev's study of Financing Technology Entrepreneurs and SMEs in Developing Countries: Challenges and Opportunities.

Although the situation can differ among countries and individual businesses, the financing gap for SMEs in the developing country has a few well-accepted causes. These include:

Information asymmetries between investors and entrepreneurs
Higher risks associated with small-scale activities
Sizeable transaction costs associated with SME financing
A lack of collateral held by SMEs for loans

These factors can be exacerbated by institutional factors within a country and are often more severe for SMEs operating in the ICT/ICTE industry due to lack of understanding about their economics and business models.

Finally, there are a number of "demand side" considerations that deserve more attention. The following three factors play a considerable role in perpetuating the SME financing gap:

The poor quality of projects seeking funding
The inability of SMEs to make the best possible use of available resources of funding
The negative attitude displayed by SMEs towards equity financing

By Roberto Zavatta, Economisti Associati SRL in collaboration with Zernike Group BV and Meta Group SRL. Published June 2008.

Learn more: Innovation & Entrepreneurship

Activity file: Financing Challenges Facing ICT-Enabled SMEs

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