The barriers keeping SMEs away from funding were one of the pivotal topics of the SME Finance Forum, held this week in Madrid. José Manuel González-Páramo analyzed how to improve access to financing for many micro, small and medium sized enterprises, as well as the regulatory framework for both banking and alternative funding sources, “We need to eliminate barriers for SMEs' to widen their funding sources,” he underscored.
BBVA’s Executive Board Member, Head of Global Economics, Regulation and Public Affairs spoke about the importance of small and medium-sized enterprises contribution to economic growth, innovation, job creation and social cohesion around the world. “SMEs typically account for more than half of business sector activity and around two-thirds of employment,” he said. The EU is home to almost 24 million smaller companies that have fewer than 250 employees.
In fact, he continued, EU SMEs have clearly recovered from the financial crisis. However, Spain SMEs continue to underperformp with value added below the pre-crisis level of 2008.
What measures should be adopted in this country to help these companies grow? José Manuel González-Páramo cited four: improve access to financing, close the gap between demand and labor supply and reform the hiring system, and a regulatory reform.
José Manuel González-Páramo spoke about the importance of small and medium-sized enterprises contribution to economic growth, innovation, job creation and social cohesion around the world.
The relationship between SMEs and banks
The main purpose of banks is to finance the economy, and therefore SMEs. According to BBVA’s executive board member, currently the relationship between banks and SMEs is characterized by the lower level of standardization of SMEs compared to large corporations, as regards financial reporting, for instance. Also, SMEs usually typically build long-term ties with their banks and tend to rely on a handful of banks to cover their financial needs.
Crises, said José Manuel González-Páramo, cause these two factors to exacerbate causing SME loans’ interest rates to rise more steeply than those for larger firms.
SMEs and alternative funding sources
Although bank lending is the main source of external funding for SMEs, González-Páramo explained that there is a wide variety of alternative funding sources which are, in certain cases, more flexible than the traditional banking channel.
Among non-public funding initiatives, he mentioned business angels, private equity funds and digital financial solutions, that provide an alternative to banks. The latter include P2P lending marketplaces and crowdfunding platforms.
Gómez-Páramo cited two main areas where fintechs have a competitive advantage compared to compared to traditional banks they have a better reputation, and they are not as regulated. They also offer a wonderful user experience. José Manuel González-Páramo considers that they can be complementary to banks, not only to competitors. Moreover, banks can learn quite a lot from these new players.
The key role of regulators
BBVA’s executive board member underscored that the regulators can do a lot "so that financing reaches SMEs more easily." In this respect, he noted that banks have four action levers: first, alleviate the potential impacts that regulation may have on SMEs loans. Second, prepare the ground for a truly European banking market and at the same time for an effective capital markets union.
Also, he considers that the creation of this regulatory architecture poses challenges such as the creation of a level playing field. Finally, José Manuel González-Páramo called for the need for authorities to define a coordinated approach to provide SMEs with the digital and financial education they need.