Rescuing SMEs from the COVID storm: What’s next?

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Rescuing SMEs from the COVID storm: What’s next?

This article is part of a series in which OECD experts and thought leaders – from around the world and all parts of society – address the COVID-19 crisis, discussing and developing solutions now and for the future.

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Small and medium-sized enterprises (SMEs) have been at the front line of the economic shock caused by the COVID-19 pandemic. Lockdown measures have put a sudden break on economic activity, with plummeting demand and disrupting supply chains worldwide. In early surveys, over 50% of SMEs indicated that they could be out of business within the next few months. Since then, bankruptcies have piled up and start-up rates are collapsing. For example, already by March in the US business applications were down between 40% to 75% compared to the previous year – a contraction even sharper than during the Great Recession.

SMEs and entrepreneurs provide every two out of three jobs in the OECD area and contribute half the GDP. These figures point to a potential sacrifice of large segments of our economies. Indeed, OECD data shows that SMEs are overrepresented in the sectors most affected by the lockdown measures, namely tourism, retail and professional services, and construction and transportation, where they account for three-quarters of all jobs. The outbreak has revealed the high vulnerability of many of those small businesses, whose conditions are worsening the longer the current situation lasts. 

Governments globally have responded swiftly, and on an unprecedented scale, to support their small businesses - going far beyond measures taken in the aftermath of the 2008 financial crisis. Since early March, the OECD Centre for Entrepreneurship, SMEs, Regions and Cities (CFE) has mapped SME policy responses to the pandemic. They have been wide-ranging, from deferral of taxes and payments, loan guarantees, direct loans and grants, to supporting temporary redundancies, wage subsidies and assistance for reduced working hours. Most of these measures involved: “give money now and check later.” It was indeed difficult to proceed otherwise as saving as many SMEs as possible was of the essence and imposing conditionality or administrative steps would have slowed down the process.

Read in full:  Coronavirus (COVID-19): SME Policy Responses

Coronavirus (COVID-19): SME Policy Responses
Image: Shutterstock/Rawpixel

As countries continue to scale up and adjust eligibility criteria of current support measures, there are concerns about how to reach those SMEs that have missed the boat and ensure the support actually goes to the businesses that need it the most. Concerning loans, the big elephant in the room remains how to manage future SME debt, not only to avoid the pre-mature closure of viable SMEs, but also since a further deterioration of SMEs’ financial situation could have systemic effects on the banking sectors as a whole. Although some countries have pledged unlimited support, it seems difficult to maintain the breadth of current support much longer without compromising the sustainability of public debt.

Given that many SMEs and entrepreneurs will inevitably go out of business, how can governments make this process as painless as possible?

Economic prospects are increasingly gloomier, especially on the possible depth of a global recession. In such a highly uncertain environment, understanding what is next for SME policy is critical. Given that many SMEs and entrepreneurs will inevitably go out of business, how can governments make this process as painless as possible? How can they foster the capacity of healthy SMEs to rebound and even ensure they emerge more resilient and competitive from the crisis? How can they re-ignite business creation?

To help SMEs now and pave the way for a resilient recovery, governments must consider at least three critical actions: 

First, governments must announce sunset clauses of current support measures and progressively adopt a more focussed support strategy for recovery. Timing and pace is critical. Withdrawing support measures too early may provoke massive failure of firms and leave competition even weaker, but prolonged support could result in distortions, reducing incentives to adapt and innovate, and trap resources in unproductive activities.

Second, governments should ensure that entry and exit of firms gradually resume in a way that is supportive to an inclusive recover (i.e. without further penalising those that were the most affected by the crisis, such as youth, women and migrants). There is an opportunity to improve insolvency regimes, facilitating the closure of unproductive businesses and restructuring of viable ones, and enhancing entrepreneurs’ ability to start new businesses following a failure. As bankruptcies may increase dramatically, reforms should limit negative effects and reduce personal costs for honest failed entrepreneurs.

A Profound Fragility: Why we cannot afford for women entrepreneurs to lose out in this crisis by Chiara Condi, President and Founder, LED BY HER

A Profound Fragility: Why we cannot afford for women entrepreneurs to lose out in this crisis by Chiara Condi, President and Founder, LED BY HER

All this requires the development of criteria to assess which SMEs should get support throughout recovery and the transition to new business models. Applying traditional criteria to identify “viable” businesses – such as balance sheet data or recent credit history - may not work with such a large shock. For example, leveraging Fintech developments and digital tools for more effective credit risk assessment, service delivery and monitoring can all help overcome the limitations of traditional approaches to business financing at a time of unprecedented uncertainty. So far, governments have not effectively leveraged these instruments. Furthermore, non-debt financing instruments should be used more to better address diverse needs in the SME population and strengthen their capital structure (e.g. equity, mezzanine-finance, leasing or factoring).

Third, government support should reach those entrepreneurs and SMEs that may increase the resilience of economies and societies in a post-COVID era. Innovative start-ups, entrepreneurship and new business models should be promoted.  At the same time, the large “missing middle” of traditional SMEs and micro firms that struggle to seize the benefits of the digital transition must accelerate digitalisation and technology adoption, organisational change and skills upgrading. Out of the crisis, SMEs need to emerge digitally better equipped and with strengthened workforce capabilities. Only few policy initiatives have aimed to enhance longer-term resilience of established businesses and the potential for growth of SMEs. For example, Korea and Ireland have acted to help small business adopt new work processes, speed up digitalisation and find new markets. Such structural support measures, together with smart conditionality, should be included in the next phase of policy responses.

Impact Entrepreneurs: Building solutions for a post-COVID-19 world by Tatiana GladCo-Founder and Director, Impact Hub Amsterdam

Impact Entrepreneurs: Building solutions for a post-COVID-19 world by Tatiana Glad, Co-Founder and Director, Impact Hub Amsterdam

It is still too early to assess the complete picture, but this crisis may put large numbers of SMEs out of business, alter competition conditions and give some firms, likely the largest ones, more market power. Business survival at risk, financial capacity at half-mast, and less competitors on the market hampers risk taking and innovation. Yet, new opportunities may emerge for innovative entrepreneurs and SMEs. Some new entrepreneurs and established small businesses did respond rapidly and adapted to new demands or changed their business model. Many more will need to adapt swiftly, seeking new markets, improving processes, rebuilding networks and supply chain linkages, and embracing organisational change. After the urgency, governments should start betting on their SMEs and entrepreneurial talents, and make them fully part of the economic policy solution for a post-COVID world.

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