Unlocking progress: Overcoming capital barriers for SMEs

Dr Judith MS Mark

Many SMEs in TT face challenges securing the necessary funds to expand operations, invest in new technologies and navigate market fluctuations.

Ensuring that these enterprises have access to adequate financing is essential for fostering a vibrant economic environment, promoting entrepreneurship and achieving long-term economic stability.

Thirty per cent of small and medium-sized enterprises (SMEs) in Latin America and the Caribbean (LAC) have identified access to capital as a challenge, compared to a 12 per cent rate for developed countries.

The situation for SMEs in TT mirrors the LAC region, indicating the need to address the issue of access to capital, given the importance of the sector to TT's economy.

Further, various studies indicate that SMEs in TT account for 35 per cent of employment and 30 per cent of GDP.

Why do SMEs in TT face financing challenges and how can these be addressed to ensure sustained growth and resilience?

The challenge of access to finance is often rooted in issues other than the availability of capital – the firm’s philosophy, leadership, governance and growth strategy impact capital adequacy and suitability.

To ensure that SME financing is inherently strategic, consideration must be given to the following:

• The financial ecosystem.

• The internal environment – philosophy, leadership and governance.

• The SME financing strategy.

TT’s financial ecosystem

The source of SME financing in TT can be classified into two categories based on usage.

Frequently used:

• Debt Financing

• Personal Funds

• Grant Funding

Not frequently used:

• Third-party equity

• Venture capital

• Angel investors

• Crowdfunding

• Peer-to-Peer (P2P) lending

• Supplier financing

• Invoice financing

• Stock market

Bank loans are the main form of external debt among SMEs in TT.

Although excessive debt can lead to a firm’s demise, debt – well-placed within a firm’s capital structure – provides an impetus for growth.

Grant funding is primarily accessed by smaller SMEs and for special projects.

Under the Ministry of Trade and Industry’s Grant Fund Facility, funds are available for R&D, export readiness and skills development.

For the less frequently used sources, there is a dearth of structured private equity and venture funds, angel networks and crowdfunds.

A review of the TT venture capital industry indicates that incentives under the Venture Capital Act 2004 did not yield the desired results.

Notably, Jamaica, which initially lagged TT in the venture capital market, expects to raise over US$95 million in 2024.

There is little evidence of SMEs' knowledge and use of peer-to-peer lending and trade credit in TT.

SMEs seeking to scale up can also raise capital by listing on the second tier of the local stock market, although, the listing criteria are onerous for many.

However, given the available incentives and information, SMEs are now expected to be better equipped to raise public capital.

Legal and regulatory

The increasing use of financing technology globally is attributed to the ease of interaction between providers and users of capital.

However, regulatory measures are required to support entrants to the digital finance space and ensure statutory compliance.

Knowledge and skills

Another limitation is the inadequacy of financial advisory services for SMEs.

Knowledgeable financial intermediaries must advise on instrument appropriateness, capital structure, pre-funding requirements and post-funding measures.

There is also a skills gap among those who assess the viability of proposals from SMEs.

The inability to see the potential of ventures and the absence of an appropriate methodology for determining risk can result in onerous demands for information to evaluate funding proposals.

Internal factors

Leadership: SMEs in TT are predominantly family-owned and dominated by the founder/leader.

The founder’s philosophy often determines the firm’s financing strategy.

Where the owner perceives significant ownership as necessary to create a legacy, there is a reluctance to engage third-party capital, although such capital can boost the firm’s productive capacity. Firm philosophy, leadership mindset and access to capital are inextricably linked.

Know-how: Financiers make decisions based on risk. Management competencies are key to business success.

Gaps in knowledge, skills and business continuity plans are matters that local SMEs need to consider when seeking capital.

Social capital: In TT, social capital is a critical ingredient in business success.

SMEs with social networks are better placed to attract financing.

Forging the right networks is advantageous as it builds trust and validates information required in the due diligence process.

Governance: To attract capital more effectively, SMEs must adhere to good governance practices.

Tax avoidance and "double books" are failed strategies.

Good governance is a prerequisite for resilience.

Given the increasing focus on ESG principles, these will be increasingly factored into the due diligence process.

SME financing strategy

Financing for resilience requires alignment between purpose and strategies.

SMEs with data-driven models obtain information more readily, proactively manage operations and project financial needs, and assess the impact of different financing options on firm growth.

SMEs checklist – financing for resilience

1. Develop a financing plan that is aligned with the firm’s philosophy and strategy.

2. Become knowledgeable of traditional and alternative financing whether currently available in TT.

3. Develop funding proposals supported by market insights and data.

4. Adopt an entrepreneurial mindset, be open-minded about non-traditional or alternative financing options.

5. Align and stage the financing needs to company’s growth plan.

6. Identify the company’s risks and have clearly developed risk mitigation measures.

7. Develop a business continuity plan, inclusive of continuity, post the founder’s involvement at the company for reasons inclusive of death.

8. Keep proper records and use relevant metrics to support firm performance.

9. Continuously review the business model to ascertain any change to funding needs.

10. Engage qualified intermediaries to assist with the preparation of pre-funding documents, proposals or specific areas of the financing process.

11. Do not present what you are not knowledgeable of, engage a resource to act on behalf of the company but aim to have a fair understanding of the issues.

12. Embrace technology and develop the capacity for accessing digitised financing.

13. Develop social networks – social capital is important in TT and can result in the formation of alliances that assist with access to capital.

14. Adhere to principles of ESG by instilling sustainability practices throughout the company.

15. Undertake due diligence on the providers of capital, including the criteria used to provide funds.

As the search continues for a financing model towards SME resilience in TT, attention must be given to factors affecting access to capital.

The state’s role in facilitating diversity in SME financing and readiness of TT for fintech cannot be overstated.

Private sector groups such as chambers of commerce are expected to take a lead role in mobilising players and lobbying for change, given the benefit of a thriving financial ecosystem to their constituents.

Establishing an association of SMEs or bodies committed to the sector will ensure a coordinated approach to providing much-needed advisory services and addressing the challenges.