The Association of Chartered Certified Accountants has published a new policy paper recommending that governments and policymakers encourage financial literacy among small businesses, remove uncertainty in regulation, and encourage the publication of more information to enable entrepreneurs to gain access to more funding.
“Our research suggests a worrying lack of financial awareness among the world’s entrepreneurs,” said Rosanna Choi, who chairs the ACCA’s Global Forum for Small and Medium Sized Enterprises, or SMEs. “As the SME sector’s most trusted financial advisers, finance professionals have proven they can lead the drive for financial education, and we call on policymakers to engage the profession more fully in their efforts.”
For the document, Innovations in access to finance for SMEs, the forum reviewed a wide range of innovations to improve SMEs’ access to finance with the aim to determine the factors that give rise to financing innovations, the measures that could help them reach more businesses, and the obstacles that hold them back from their potential.
“Businesses and entrepreneurs have never generated anywhere near as much data about themselves as they do today,” said Warner Johnston, head of ACCA USA, in a statement. “Yet the financial sector is only just beginning to catch up with the volume and scope of relevant information and its potential for informing investment and lending decisions. Finance professionals have the knowledge to help innovative businesses connect the dots.”
The research found that businesses and investors have lost faith in banks, while new capital and liquidity regulations are forcing banks away from traditional lending to small businesses. Ultra-low interest rates have sent investors in some parts of the world looking for better returns on their money, prompting them to explore new asset classes that were previously unavailable, such as direct lending to SMEs.
There has been a rise in e-commerce platforms and payment systems that are creating their own financial information and that increasingly use real-time information rather than historical data, the paper noted. Online financial intermediation is becoming increasingly acceptable to businesses and investors.
International coordination, by the G20 leaders and the World Bank Group among others, has been vital in highlighting examples of financial innovation with the capacity to benefit SMEs in many parts of the world, in drawing attention to common barriers to SME finance, and in spreading knowledge of best practices.
The Forum identified three obstacles to innovation in SME funding.
There is a lack of financial education among SME owners. ACCA has urged policymakers to reconsider their approach to financial literacy, focusing on a “business plan first” strategy where qualified finance professionals deliver “just-in-time” training and mentoring based on the business’ needs.
There is a lack of effective financial infrastructure—from credit databases and payment systems to asset registries and credit risk databases in much of the world.
There are substantial uncertainties in legislation, regulation, and accounting rules that must be resolved. The most substantial issues highlighted by the Forum relate to the protection of minority shareholder rights; the classification of receivables under accounting rules where payment terms are extended, for example in multi-lender platforms of supply chain finance (SCF) programs; the status of factored receivables in bankruptcy; the regulatory risk weightings applied to bank payment obligations; and the regulatory status of new alternative funding providers.
“On the whole, the Forum does not view regulation as an enemy of financial innovation,” Choi said. “Of course, the banks’ ability to finance businesses has been hit by regulation; in some cases, this has been vague or ill-thought-out. Other providers are certainly taking advantage of the banks’ regulatory weaknesses. But it is clear to us that smart regulation can positively spur innovation by building much-needed financial infrastructure and offering greater certainty to finance providers and users.”