The newly established companies and SMEs are often too small to raise their capital in the public market and also not efficient enough to complete a “debt” offering or secure a “bank” loan with their limited operating history.
Why worry about the financing issues of small and medium-sized enterprises (SMEs)?
In Europe, there are more than 21mil companies in the SME sector, employing nearly 90mil people. In the United States, 30mil SMEs account for nearly two-thirds of net new private sector jobs. Hence, the SME sector is significant for both economic growth and employment. Firms with fewer than 250 employees are important players in all sectors within an economy.
SMEs’ borrowing demand in % (left); credit demand in EUR thousands (right)
SMEs' reasons of borrowing and financing
SMEs have been severely underfunded, and financing with internal cash is an unlikely scenario. SMEs face numerous obstacles in borrowing funds because they are small, less diversified, and have weaker financial structures; facing payment delays on receivables, limited liquidity, and a general increase in SME insolvencies and bankruptcies. Furthermore, SME firms find it difficult to provide high quality collateral at all times or insure transparency with respect to their creditworthiness, to attract external debt sources.
SME M&As are more likely to be financed with equity rather than debt, long-term borrowings particularly. Costly though, often comprised of more stock and less cash than the average deal for large enterprises. M&As also are only an option at a certain economic size of a firm. Often PEs only look at companies of 50mil and more revenues, to be considered.
Recommendations are alternative forms of financing, improving loan support and guarantees, enhancing access to long-term financing and promoting non-bank financing alternatives
Tokenization democratizes capital markets and transforms traditional financing
Cryptocurrencies can be a more inclusive financing vehicle by allowing small retail investors to participate in the financing of small businesses and startups. Depending on the type of rights accosted with the tokens, companies can raise risk capital with or without sharing ownership or dividends. SMEs are granted direct access to an unlimited investor pool. Investors enjoy high liquidity of their investment and almost instant trading opportunities.
Benefits of ICO/STO
However, the potential of STO/ ICOs as a mainstream financing option for SMEs is still limited at this time, due to the yet to be determined regulatory framework for the crypto-asset market.
Also, a differentiation has to be made between Blockchain-enabled projects, products or services, and businesses that are not built on DLTs (Distributed Ledger Technology). The former has a higher potential of benefiting from an ICO, whereas the latter has to offer other benefits to investors such as equity or revenue share.
Still, the benefits of this new disruptive crowd-funding is immense. Once regulatory clarity is reached (at least in some jurisdictions) literally everyone can invest in high potential new tech-startups or fuel a successful existing company's expansion.
The many different ways of fundraising within the Blockchain/ Crypto space I explained here. If not fundraising is your goal, but exploration of Blockchain as technology to stay competitive, here and here you can find out if Blockchain is applicable to your business.
#IWSFinTech consults on and develops disruptive technologies such as FinTech or Blockchain (project management/product). IWS FinTech focuses on next-generation technologies that will impact lives in the next decade.
Partner with the world’s leading corporates to support start-ups / SMEs through co-development and co-creation. At the same time, our corporate partners are able to inject new technologies and innovations into their existing businesses.
IWS develops proprietary software products; and consults your company or start-up on development through
1) Guidance on corporate structure, equity planning, business model, product-market fit, marketing, branding, finance, legal, pitch deck, valuation, capital raise planning, media training,
2) Mentoring through our network of successful entrepreneurs, industry, finance, and investor relations experts, and
3) Resources such as facilities support, market expansion & landing, business partners, government & academia resources, investor relations, media relations, accounting & legal services, etc.
Sources: OECD, KfW SME, World Economic Forum, IWS FinTech