Small and medium businesses in particular may find it challenging to get finance, according to research by the ICMA. SMEs, typically referred to as businesses with less than 500 people, are the foundation of all economies, yet they frequently have fewer and more expensive financing choices. Due to increased regulatory scrutiny brought on by banks’ increased risk aversion during the global financial crisis, SMEs are riskier investments than bigger enterprises. ICMA has also recommended some guidelines, which can help SMEs to access capital with ease. Continue to read and we will be sharing more details about it in detail.
Why do SMEs need to access capital markets?
Although capital markets are a well-liked source of funding for big businesses and a viable alternative to bank loans for SMEs, the ICMA survey found that only 25% of SMEs utilize equity financing as their main method of capital raising. The lack of familiarity with capital markets, relatively high regulatory fees, and fear of losing control of the company combine to deter SMEs from entering financial markets.
SMEs that have used SME capital markets rarely move up to main markets, which offer better benchmarks for a company’s valuation, ensure a stable investor base, attract institutional and foreign investors, and improve a company’s reputation. Many countries have capital markets aimed at smaller companies looking to raise money.
According to the ICMA research, “Jurisdictions have had unequal success in aiding SMEs to reach the financial markets.” “… New and alternative forms of finance should be taken into consideration by incorporating more innovation and technological advancements.” One example given in the report is a strategy used by the Chinese e-commerce business Alibaba to address a significant barrier to SME funding. Alibaba analyzes the trade and payment information it gathers to assess the creditworthiness of SMEs for loan distribution and repayment.
Best practices to access capital for SMEs
The ICMA research also lists asset-backed lending, securitization, and crowdsourcing as further cutting-edge methods of SME financing. Additionally, ICMA made seven proposals to facilitate SMEs’ access to financial markets:
Review the existing SME issuer-specific securities regulatory requirements.
In order to minimize the minimum free float, revenue, market capitalization, number of public and minimum shareholders, equity, paid-up capital, and profitability criteria for listings, regulators should remove disclosure duties that are of little value to SMEs. Regulators need to cut registration and listing costs for SMEs to minimize the cost of financing.
Provide options besides a public offering
SMEs should be allowed to access capital markets via private offers that don’t call for prospectuses or offering papers if they don’t intend to go public. A backdoor listing is another option, which entails a private SME purchasing a publicly traded firm. A prospectus, filing statement, or shareholder information document for the target public business should be included in backdoor listings.
Ensure the safety of investors
Regulators must maintain the trust of retail investors without overburdening SMEs. Regulators may require SMEs to provide less information in order to achieve the correct balance, but the information that is published should emphasize the specific investment risks that apply to SMEs.
SME stock should be traded
It may be difficult to sell SME shares due to a small number of outstanding shares and a limited investor base. A market-making mechanism might be implemented to assist. Additionally, it’s critical that investors in SMEs have affordable access to research and rating information. Encourage relevant organizations to regularly publish investing research on SME securities.
Policymakers should think about establishing measures that would let a SME to provide another firm the opportunity to acquire its shares as a lead-up to an acquisition in order to safeguard the integrity of the SME market. A lock-up clause like this would guarantee that management stays committed and that the securities issued are fairly priced.
Educate the public on the need for SME finance
To highlight the advantages of capital markets and raise public knowledge of the need for SME financing, regulators and policymakers can organize advertising campaigns, open seminars, and conferences.
Policymakers could think about launching a website that provides information to investors and SMEs as well as regular analyst reports on SME securities.
Create a mechanism to make sure SMEs adhere to legal obligations
Policymakers should think about creating a staff that responds to SME inquiries and tracks compliance in order to make sure that SMEs follow the law. SME shares should be regularly watched, and where required, market manipulation should be looked into.
SMEs should get assistance from designated consultants who are registered with or authorized by a stock exchange throughout the application process for listing on the stock market. The issuer and the advisors might both be held accountable for the veracity of the information and documents made available to the public.
Encourage the demand from investors for SME shares
Long-term institutional investors in developing and established economies may be attracted by initiatives to combine highly rated SME securities and reduce transaction costs. To adequately finance SMEs, institutional investors are also required in addition to individual investors.
Speak with venture capitalists or angel investors.
You may approach an investor if you’re still looking for funding to expand your company. In exchange for money, they’ll give you a financial interest in your company, perhaps a big one (and your profits). The good news is that you won’t have to worry about loan repayment.
While angel investors are frequently rich individuals or organizations, venture capitalists typically represent businesses. Each often comes with a sizable network of really successful businesspeople you may consult for guidance. However, there are disparities in terms of their financial situations and reasons for investing, business.com wrote this.
Venture investors often assist your company’s operations and expansion by appointing management or board members. Typically, angel investors don’t. Additionally, venture investors often take making a return on their investment on a quick schedule more seriously. They aim to quickly grow your company so they may recoup their investment by selling a portion of it.
However, you’ll undoubtedly need to make a business presentation to venture capitalists and angel investors if you want to get their funding. It’s critical to have the particular talent of pitching if you want to be successful when approaching these donors.
If you follow these instructions, you’ll have access to money that can help you realize your company goals. Make sure that you get the most out of these best practices to access capital without a hassle.