Will the Financial Crisis affect your SME?
By Thierry Sanders
(Republished from ) February 2009
The financial crisis has been an earthquake for banks, investment banks and funds. It is now starting to take hold of the real economy. The real economy, of shops, factories, businesses and consumers. The demand for products and services is dropping fast in this real economy. Businesses are losing customers and are having to lay-off employees. Prepare yourself, because the recession will last at least 2-3 years. The question here is: How will this affect small and medium sized enterprises (SMEs) in developing countries?
SMEs feeling the crunch most
a) SMEs with large loans with a variable interest rate have seen the cost related to interest payments increase as interest rates rise. The interest rate is the price of money. Now that banks are having trouble finding finance themselves, the price of money (interest rates) is on the raise. SMEs with a fixed interest loan will not feel the pain. However, if your interest rate period will end in the next two years, prepare for higher rates or prepare to pay off your loans.
b) SMEs that are currently dependent on exports will be the first to feel the effects of reduced demand for their products. They will also be the first to feel demand pick up when the recession comes to an end in 2-3 years. It is important to develop a local client base in the coming period to diversify your exposure to export markets.
c) Those SMEs producing commodities, or dependent on them, will have seen the prices for their products drop dramatically. Commodities like grains, cereals, foodstuffs; minerals and oil based products have been especially hard hit. Even more so if they were dependent on export markets.
d) SMEs or Micro-entrepreneurs who are paying off their loans with remittances are going to face problems. Already Mexicans in the USA are sending less money home to their family. many of these family members are paying off their (micro) loans with this remittance money. They are now having to default on thier loans.
SMEs that will be reasonably well off
a) SMEs with little external financing; with fixed interest loans or with long term risk based equity agreements will not see significant changes in the cost of financing.
b) SMEs with a large national market and not dependent on export markets or commodities will see demand reduce, but not as severely as the SMEs described above.
c) SMEs who use commodities as an input for their production process are reasonably well off, since the cost of their inputs have dropped.
How will the financial crisis affect the availability of finance to SMEs?
a) Bank loans. Loans will be harder to get and the rules and regulations regarding risky loans will become increasingly strict. This is bad news for SMEs, especially startup SMEs, since they form the riskiest borrowers. But then again, what’s new? Loans to SMEs from the banking sector have always been hard to get.
b) Venture Capital Funds and informal investors. A well managed venture capital fund or investors will always keep a large share of ‘liquid’ capital (i.e. cash or savings deposits) so that they have money to invest in a new investment opportunity. However, badly managed funds will have put their ‘liquid assets’ into shares on a stock market. The value of these ‘assets’ will now have lost almost half their value. It is therefore no time to sell these shares, and consequently they will have little cash to invest in SMEs. Sadly, most funds and investors are in this category,
c) The good news is, that well managed investment funds, with cash to spare, will be going on a spending spree over the next year – buying shares (not offering loans) in SMEs that operate well, have a strong customer base but are undervalued.
In other words, there is little cash floating around for loans.
But, if you have an established SME that can survive the downswing over the next 2-3 years and you are willing to accept outside shareholders – you may be in for a pleasant surprise.