Financing SMEs

For small businesses, obtaining finance that suits specific needs is never easy, particularly in a crisis. What can be done? Tunisia has some answers.

Small and medium-sized enterprises need adequate financing to meet needs at each stage of their life cycle, from creation through operation, development, restructuring, recovery and beyond.

The staying power of a business, its development and its growth will depend in large part on its financing structure (equity, debt), its management, and the kind of assistance it may receive.

If the financial structure is skewed, dominated by short-term credit to the detriment of medium and long-term debt, then an SME's life is likely to be cut short.

And if the head of the business does not receive proper financial guidance, preoccupied as he will constantly be by day-to-day management issues with customers, suppliers, staff, production, administration and the like, this may also pose a major risk to the performance of the SME, its transparency and its relationship with its financing sources, whether banks or venture capital investment firms(Société d'Investissement à Capital Risque, or SICAR).

Consequently, any policy aimed at promoting and increasing the pace of SME creation as a source of wealth, jobs and development must take one fundamental aspect into account, namely the specific financing needs of this kind of enterprise.

In addition, modes of financing are changing and depend in particular on the size of the firm, its sector of activity, and whether it is at the creation or expansion stage of its development. Yet any active strategy has to develop tools suited to the needs of SMEs in terms of equity capital, bank credits, and guarantees.

Consider equity financing.
Strengthening the equity capital of an SME implies less reliance on debt and consequently reduced financing costs for the firm. Apart from the promoter's own contribution, incorporating the business and selling shares is bound to strengthen its financial situation, increasing the proportion of equity to debt in its capital structure. It also serves to improve transparency, which is a major step forward compared with individually held businesses. Tunisia has introduced some very effective instruments to strengthen the equity position of SMEs.

There are tax breaks for parties who subscribe to and participate in the capital of SMEs. This translates into a reduction of the tax base at variable rates and consequently a lower income tax burden at the end of the year. Tax relief is granted at variable rates in line with national goals set in advance. Those rates vary as a function of the project's location, such as 100% in Regional Development Zones, its focus on exports, etc.

There is flexible and light taxation for venture capital investment companies (SICARs) and venture capital mutual funds (FCPRs), which hold shares in the capital of SMEs, notably those run by highly-educated people, SMEs established in Regional Development Zones, SMEs specialised in new technologies, and so on.

And there are government-owned funds (Fonds de l'Etat) financed from the budget. These can be used to round out the financing scheme in the form of repayable advances, i.e. personal loans to the owner ("promoter"), with repayment terms longer than 10 years, grace periods, and very low interest rates; and equity investments through SICARs, which manage such investments on behalf of the state.

In this case, priority will be given to promoters to buy back the shares after a fairly long interval. Moreover, the dividends generated by these shares do not flow to the government-owned fund but are returned to the promoter and will be used exclusively to repurchase shares from the fund. Furthermore, the SICARs that manage the fund's holdings in the capital of SMEs are themselves required to take an interest at least equal to that of the fund, with the result that the contributions from the promoter, the subscribers, the state fund and the SICARs will significantly increase the equity portion of the project's financing.

Bank loans are also important. SME access to bank loans is always subject to a reliable technical and economic feasibility study, as well as the presentation of real guarantees or collateral as required by the banks.

In its initial creation phase, an SME with limited financial means may face a real problem in coming up with money to pay for a feasibility study, especially if it intends to use an expert consultant. This problem may tempt SMEs to carry out the feasibility studies themselves, though these would be unacceptable to the banks.

It is interesting to note here a popular solution Tunisia has provided for helping people with business ideas in their quest for financing for feasibility studies.

A special mechanism has been introduced that involves a subsidy of up to 70% of the cost of the study. That subsidy may be paid directly to the consultant or to the promoter. It is paid only if the study is accepted by the banks and the SICARs, which will in this case issue an agreement in principle to finance the project.

This mechanism has led to the creation of specialised consulting firms set up by highly qualified people who secure financing for their clientele. To further improve SMEs' access to tailored financing, a specialized SME bank, the BFPME, has been created to supplement the array of institutions already in place. This special bank covers the entire range of advisory services, monitoring and financing for SMEs. It is also responsible for co-ordinating with other banks and venture capital SICARs to put together project financing packages.

One difficulty SMEs face is that they are generally not in a position to give real guarantees to the banks apart from the components of the project, particularly in the case of young entrepreneurs seeking to create their first project.

This constraint can reduce the number of projects, however intriguing their business idea and however well-educated and recognised their promoter. It is in this context that a Tunisian guarantee company, SOTUGAR, was created to guarantee loans and equity investments in SMEs.

SOTUGAR shares the investment financing risk with its financial partners, taking for its own account a portion ranging from 50% to 75% of the outstanding amounts guaranteed.

This guarantee arrangement fully meets the needs of Tunisian SMEs, and considerably reduces for them the burden of meeting lending institutions' demands for real guarantees. Yet SMEs are often slow to take advantage of this facility.

Together with the financing mechanisms that can be put in place and the many financing products offered, SME entrepreneurs need to develop a financial culture and acquire a minimum understanding of financial standards and rules. They cannot be content with mastering just the production and marketing aspects of running a business.

Instead, they should look to the specialists in this area, whether through internal recruitment or in the form of consulting services. This will enhance the prospects for SMEs to develop and overcome the difficulties they face.


For more on OECD work on SMEs, visit, and,  and

© OECD Observer, No. 275, November 2009

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