What Future For SMEs?

With lockdown easing in many places, small and midsize enterprises can get back to business; but they face huge hurdles.


Business headlines in recent months have inevitably focused on the impact of Covid-19 on multinationals such as airlines and oil firms. Household names like Virgin Atlantic have taken a big hit. But small and midsize enterprises (SMEs) are arguably a more important part of the global economy—and the challenges they face may be greater than those of corporate goliaths.

SMEs account for 99% of firms, 70% of jobs and up to 60% of value added among the Organization for Economic Cooperation and Development (OECD) countries. In emerging economies, SMEs contribute up to 40% of GDP, according to the World Bank. They are major innovators in the tech and biotech sectors, accounting for more than 70% of China’s patents for instance, according to the Rand Corporation think tank.

However, SMEs’ relatively small size also makes them vulnerable to external shocks. The concurrent supply chain disruption and collapse in demand that occurred in March and April, when governments reacted to Covid-19 by shutting down swathes of the global economy, dealt a heavy blow to SMEs. Many small companies could not work remotely. The UK’s Office for National Statistics says 24% of firms temporarily closed or stopped trading after lockdown was announced.

Moreover, the crisis has exacerbated existing working capital challenges faced by many SMEs, according to Neil Daswani, global head, Business Banking and Corporate Partnerships at Standard Chartered in Singapore. A survey by Tsinghua University and Peking University estimates that 85% of Chinese SMEs have three months cash. SMEs in other countries face a similar predicament, and some of the worst affected sectors have almost no cash buffer: A JPMorgan Chase Institute report estimates that restaurants have cash reserves of just 16 days on average.

Government to the Rescue?

To stem the impact of the Covid-19 shutdown, governments around the world have enacted emergency measures to provide funding and other support. The programs and their scale are constantly evolving; but the numbers are vast, even compared to post-2008 financial crisis relief, according to Lamia Kamal-Chaoui, director of the OECD Centre for Entrepreneurship, SMEs, Regions and Cities, in Paris.

“The quantum, speed and tenor of the response by governments are impressive; many countries are offering relief for up to six months or even as long as 12,” says Daswani. “There are government guarantees available for 80% or even 100% of lending in some countries. And many banks have also rolled out moratoriums on principal payments, payment holidays, debt restructuring and other measures.” Both the US Federal Reserve and the European Central Bank have taken various steps to ease lending by commercial banks to SMEs.

In addition to direct lending to SMEs through public institutions (underway in Lithuania, Spain and the US), and loan guarantees enabling commercial banks to expand lending to SMEs (in the UK, Switzerland and Latvia), support for SMEs has taken various other forms.

Austria, Germany and the Netherlands, have new measures to shorten working hours, prevent layoffs and relax sick leave rules. Australia, Canada, Japan, South Korea and New Zealand are providing wage and income support. Several countries, such as the Slovak Republic, Argentina and Chile, are offering grants and subsidies to SMEs to bridge the drop in their revenues.


The deepening crisis means governments are continuing to extend and broaden the support available. The US government’s initial $349 billion of PPP (Payroll Protection Program) funding was exhausted in just 13 days (and much of it went to major public companies); a second $320 billion round of funding has been made available. Similarly, at the end of April, the UK reversed itself, joining Switzerland and Germany in guaranteeing 100% of new loans to some small businesses. It is conceivable that other countries could follow Germany in taking equity stakes as part of rescue efforts.

Is the Support Working?

Making money available is quite different from its reaching SMEs. UK banks were criticized for pushing SMEs to borrow on commercial terms or insisting on personal guarantees for 80% government-backed Coronavirus Business Interruption Loans (CBILs), which are interest-free for 12 months.

There are also concerns about delays in approving loans in the UK and other markets. Figures from banking and finance industry association UK Finance show that by the end of April, less than half of the 52,807 applications for CBILs had been approved; anecdotal evidence suggests many times that number have contacted banks but have yet to make a formal application. Similar problems in Germany regarding the complexity and pace of loan-granting administrative procedures led to their easing, according to the OECD’s Kamal-Chaoui.

“The banking and finance sector recognizes the challenging conditions faced by many businesses and the critical role we must play in helping the country get through this crisis,” said Stephen Jones, CEO of UK Finance in London, in an April statement. “Front-line staff in local branches and call centers are working incredibly hard to help firms access finance as quickly as possible amid unprecedented demand.”

Standard Chartered’s Daswani says that on the whole, emergency programs have been smoothly rolled out: “Most countries have accelerated credit checks to ensure help gets to SMEs quickly,” he says. “But at the same time, it’s important to channel support to companies that have a good repayment record rather than to SMEs that may have had chronic problems that predate Covid-19.”

Kamal-Chaoui believes it is too early to assess the effectiveness of these policies and the extent to which they will help businesses survive. “What is clear is that without such measures, there would be a real danger of massive disruption and widespread bankruptcies for SMEs and the self-employed,” she says.

An Uphill Task

Restarting the SME sector will be tough. Jennifer Bouey, an epidemiologist and Tang chair in China policy studies at the Rand Corporation, says SMEs must contend with local quarantine issues, reopening permits and health regulations (carmakers and their SME component suppliers across Europe are struggling to meet social distancing rules as they restart assembly lines, for example).

Bouey adds that SMEs also face challenges associated with broken supply chains. “Upstream SME closures are felt by downstream factories that are relying on the parts they produce,” she testified before the US House of Representatives Small Business Committee in March. “Without the parts and necessary logistics to bring in materials and ship out products, many factories can barely produce or have no place to store the products.” And despite unprecedented support, cash flow will continue to be a big worry for SMEs, given that they are “financially more fragile and cash strapped” than larger corporations, Bouey said.

But while the problems facing SMEs are huge, they are not insurmountable. “It’s not all gloom and doom,” says Daswani. “SMEs not only have a raft of government and bank initiatives to draw on but, in many cases, have been agile in moving into related areas of business that are benefiting from current conditions, such as e commerce. Many will be able to respond quickly to the post-Covid-19 world. SMEs could benefit from shorter supply chains; and many are not that encumbered by bricks and mortar or legacy systems, so they can quickly respond to new demand behaviors.”

The OECD’s Kamal-Chaoui believes the crisis has reinforced the need to accelerate digitization. “Early data suggest that digitally enabled businesses may be weathering the turmoil better,” she says. “Enabling SMEs to come out of the crisis better digitally equipped should be an important ambition for public policy going forward.”

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