Overview

SMEs are often described as the “missing middle” in access to finance.  SME’s have difficulty documenting their debt service to lenders.  Lenders have difficulty justifying the cost of building the information needed to justify positive credit decisions.  Business plans provided by consultants often lack credibility with lenders and may not even be understood by borrowers.  Needed is a way to enable:

1. SMEs to better understand their own financial condition and performance and communicate this information credibly to banks.
2. Banks to lower the cost of evaluating the risk profiles of SME customers and improve their credit appraisal, credit scoring, and credit monitoring capacity.

FMI and our software tool provide a unique and cost effective approach to satisfying both these needs by providing an interactive bridge between borrower and lender that reduces the information asymmetry and facilitates financing decisions.  

Major Impediments to SME Lending

SME owners, bankers and development officials on four continents have provided valuable insight into the challenges to SME access to finance.  The consensus identified three principal problems: 

• First, the SMEs lack the know-how to provide standardized, transparent, understandable, and credible financial information to potential financial sources. 
• Second, bank credit policies are risk averse, and typically stress “clan and collateral” rather than cash-flow analysis and credit worthiness – in large part due to distrust of SMEs’ financial data.
• Third, banks, and other financial intermediaries lack the techniques and systems to efficiently assess credit worthiness and manage the SME repayment risk. 

Enabling SMEs in developing countries to expand their business activities and employment by leveraging their own resources through external financing is key to meeting USAID’s Economic Growth Objectives (generate rapid, sustained, and broad based economic growth). Effectively addressing these three impediments to access to finance for SMEs is essential to achieving this fundamental objective.

The software addresses the financial information needs of both bankers and SME owner/managers.   It bridges the information asymmetry gap (lack of standardized financial information) and streamlines a reliable evaluative process. 

Our methodology begins with a common, shared financial information communications platform, and employs it to bridge the gap between financial institutions and SMEs.   The methodology recognizes the importance of addressing constraints to SME access to bank credit that arise from SME inadequacies in their own operations.  The methodology enables SMEs to readily understand their financial operations’ results, and communicate these results to banks.  Our methodology simultaneously enables the bank to evaluate an SME’s credit worthiness by dramatically improving the bank’s financial analysis, credit scoring, and loan monitoring capacities.  Further, the methodology includes training bankers and SME owner/managers in a highly similar manner regarding financial management according to standard financial ratios. In this way, we bridge the gap between SMEs and banks, enabling them to converse on profit and loss, cash flow, financial projections, and evaluate credit worthiness to facilitate capital mobilization and build economies.

Key To Success

The problem is a failure to communicate across differing business cultures.  The solution is to provide a common language based on financial operations, financial performance, risk measurement, and creditworthiness.  When both the supply side (bankers) and the demand side (SMEs) learn to communicate on the same platform and methodology, then the three impediments to SME lending can be overcome.

The key to the success of the methodology is that it harnesses the key motive that ultimately drives economic activity:  the profit motive.  Banks will lend money when they are convinced it will be repaid at a profit.  Whatever a business does (make bread, construct walls, deliver products), its function is to make a profit.  Because banks and businesses have the fundamentally identical objective of making a profit, they must communicate in the language of finance.  Only when communication is about cash flow, cost of goods, and financial indicators can loans be made on credit worthiness (not clan or collateral), and thus much more capital will flow to SMEs.  This facilitates access to capital by the “missing middle” and results in sustainable economic growth, job creation, and increased standards of living.