SMEs: Small But Mighty

SMEs play a crucial role in driving the global recovery.

According to the IMF, governments around the world have spent more than $16 trillion since March 2020, to provide fiscal support through the Covid-19 pandemic. “Central banks have increased their balance sheets by a combined $7.5 trillion,” the agency comments—more liquidity than they have provided in the past decade—while running deficits unseen since World War II. Is it enough to spur on a global recovery?

The world is still in the grip of Covid-19, with surging variants. Countries are at different stages of vaccination efforts and some are still very much in crisis mode. However, the focus is now shifting away from emergency measures and toward rebuilding resilience and jump-starting growth after a loss of $15 trillion in output relative to the IMF’s January 2020 expectations.

Small and medsize enterprises (SMEs) have been hit particularly hard worldwide. As huge sources of employment, and representing large portions of GDP, SMEs will play a crucial role in driving the global recovery. A variety of measures remain in place to support the SMEs that have been adversely affected by the crisis, but there is little uniformity among those measures.

In Canada, which boasts rising vaccination rates, the Canadian Federation of Independent Business (CFIB) partnered with several banks on initiatives like the Canada Emergency Business Account program that grants loans for nondeferrable expenses, wage and rent subsidies, and grants to SMEs during the pandemic.

Forced To Adapt

Speaking on Scotiabank’s Pandenomics podcast in July, Dan Kelly, president and CEO of the CFIB, said recovery for small businesses has only just begun, particularly for retail and hospitality businesses. He calculated that the average small firm took on some C$160,000 (approximately $127,500) in pandemic-related debt.

The crisis forced SMEs to adapt to digital customer interaction quickly, Kelly noted, citing research that showed that 150,000 businesses that hadn’t taken transactions online previously moved to do so during the pandemic. “Small businesses were a bit behind their international counterparts in using some of the new technologies and adapting to some of the new ways of doing business that Canadians were, in many respects, asking them to,” he explained.

In the US, banks developed a range of programs to help business customers through Covid-related troubles, including unsecured loans, fee waivers and deferred payments. BBVA was among the first banks to begin processing customer applications for the Coronavirus Aid, Relief, and Economic Security (CARES) Act’s Paycheck Protection Program via the Small Business Administration. BBVA has continued to offer extensions on payments for existing small-business loans and credit cards; waived and refunded ATM, overdraft and service charge fees; and offered penalty-free CD withdrawals and fixed-rate small business loans of up to $50,000, with a delay for the first repayment.

In the UK, the state-owned British Business Bank has, since the beginning of the pandemic, offered a range of bridging facilities to help businesses stay afloat. The bank reported that equity investment in the UK’s smaller enterprises grew by 9% in 2020 to £8.8 billion (about $12.2 billion). The momentum continued into the first quarter of 2021, with the total value of equity investment in SMEs reaching £4.5 billion, a record for a single quarter.

This is in addition to a series of loans and schemes backed by the UK government to help SMEs affected by the crisis.

However, the impact of support in the UK has not been universally felt, with the Federation of Small Businesses (FSB), drawing attention in July to a failure on the incumbent government’s part to fulfill the promises it made with its flagship leveling-up agenda.

There are “significant gaps in business support for small firms and the self-employed,” says Martin McTague, national vice chair for policy and advocacy at the FSB. Although 84% of small firms received some advice during the pandemic, just 45% of those said the advice helped their businesses survive, according to FSB officials.

“[The government] should also ensure that the level of funding for business support via UK Shared Prosperity Fund matches, or exceeds, those funds previously received under European Structural and Investment funding,” says McTague.

One firm working to plug that gap is the financial marketplace Swoop. It recently announced a partnership with BNP Paribas Asset Management (BNPP AM) whereby it is offering unsecured loans of up to £5 million to SMEs—significantly more than the standard unsecured facility. The loans will form part of BNPP AM’s SME Alternative Financing direct lending activity, for which SMEs in the UK, the Netherlands and Germany are eligible.

“As a source of funding that is complementary to traditional bank lending, unsecured long-term credit offers borrowers a unique form of financing that is invaluable in supporting the sustainable expansion of their businesses,” Stéphane Blanchoz, head of SME Alternative Financing at BNPP AM, said in a statement.

Elsewhere in Europe, the European Bank for Reconstruction and Development (EBRD) responded to a surge in demand for support from its Trade Facilitation Programme (TFP). In 2020, the TFP supported financing of foreign trade totaling more than €3.3 billion (about $3.9 billion)—a record.

While the EBRD invests in economies across Europe, Asia and Africa, the reach of the EU’s European Investment Bank (EIB), which is an EBRD founding member, also extends across the Atlantic.

The organization works with the Banco Regional de Desenvolvimento do Extremo Sul (BRDE) on targeted finance for SMEs in Brazil, where access to loans or other lines of credit has long been a challenge, which the pandemic has exacerbated.

In May, the EIB entered into an agreement with UniCredit to mobilize €2.5 billion of investments in Italian SMEs and larger companies to help with recovery from the pandemic’s impact. It was the first in Italy to be backed by the €25 billion Pan-European Guarantee Fund, one of the EU’s instruments for responding to the pandemic.

Many programs being developed and offered to SMEs have an ESG flavor, with an emphasis on climate or inclusivity, taking the opportunity to “build back better.” The BRDE Climate Action Framework Loans, for instance, will see up to €30 million pledged to fund urban projects. Supported by the EIB’s Financing Energy for Low-Carbon Investment – Cities Advisory Facility, the loans aim to help project promoters provide BRDE with feasibility studies and other preparatory and capacity-building measures.

“Fostering entrepreneurship is crucial for sustainable growth, in particular during these challenging times.,” said Ricardo Mourinho Félix, vice president at the EIB, in a November press release. Separately, the EU’s Next Generation Fund is an €806.9 billion pot to help support businesses with energy-transition efforts and digitalization programs.

A similar focus on “building back better” runs through the investment community. Deutsche Bank considers Covid-19 a “wake-up call for sustainable finance” and advocates a key role for sustainability-linked bonds in allocating capital toward pandemic relief and recovery. As one of the bank’s What Next series of deep diving expert perspectives, Richard Florizone, president and CEO of the International Institute for Sustainable Development, says health care companies, for instance, “could set KPIs linked to the amount of preventive equipment or ventilators produced.” And “KPIs that focus on the recovery of a financial institution could involve the number of loans provided to [SMEs] in the hardest-hit sectors, such as tourism.”

Elsewhere among the larger investment banks, JPMorgan Chase announced a $350 million, five-year pledge to grow Black, Hispanic, women-owned and other underserved small businesses globally via low-cost loans and equiety investments, to foster a “more inclusive recovery.” The bank will commit $40 million to Black-led minority depository institutions and diverse-led community development banks [CDFI]. It is one of the largest banks working to increase the capacity and impact of CFDIs; Bank of America, Citi, Goldman Sachs and Morgan Stanley also support efforts to serve small, diverse entrepreneurs who may not fully qualify for US stimulus funds.

Recovery from this crisis will not happen overnight. But as the world moves towards a more sustainable future rather than merely developing a “crutch to a weaker version of the pre-pandemic economy,” as the IMF’s First Deputy Managing Director Geoffrey Okamoto puts it, the recovery could deliver years of solid post-pandemic growth as well as real progress with global sustainability goals.