![]() ![]() For instance, financing affiliates to e-commerce operators use network analysis of transactions to evaluate operation conditions of the obligors through more intimate observation of their business activities. Emerging technologies including big data analyses, cloud computing, artificial intelligence, and blockchain are altering the financial services landscape, enabling new data sets to be incorporated into future credit and risk pricing decisions, often by new lending entrants. These risks also translate to significantly higher funding costs for SMEs compared with larger corporates. The unique risks of the SME sector make debt financing a challenge. Performance data including default and loss history is often limited given the shorter duration of business operations and less sophisticated reporting systems of many SMEs.Disruption risk is higher because business success is often tied to the performance of a few key individuals or the provision of a limited range of services.Difficulty in access to financing and the price of financing is often high particularly if lending is unsecured. ![]() Heightened geographic risk as small businesses are more likely to operate in narrow geographic markets and have a greater sensitivity to local demand conditions.Risk of business failure is higher given the smaller operating scale and business concentration risk.Less financial flexibility given their smaller size.Business cash flows are more sensitive to prevailing economic conditions, making SMEs more vulnerable to macroeconomic volatility.Blurred line between entrepreneurs' or small business owners' personal and business finances.Some of the more common risks associated with the SME sector include: Lending to SMEs is perceived as riskier than lending to larger, more established businesses. This in part reflects the lower bank capital charges for loans where collateral, such as residential property, is provided as security. For many banks, the provision of collateral is a key determinant in setting the terms of the loans, including the loan size and interest rate payable. Table 1īanks are the major providers of SME finance outside of micro finance and equipment leasing in many markets. ![]() The definitions of an SME vary across jurisdictions but they generally benchmark to revenue or asset size, and number of employees (see table 1). S&P Global Ratings discusses here the unique risks of the SME sector, the variety of related securitization tools, and some of the analytical approaches that have been used to rate this asset class globally. The use of securitization as a funding source for the SME sector is gaining traction in Asia-Pacific, particularly in Australia and China, where the respective governments are taking measures to address ongoing funding challenges for this sector. In recent years, the increasing presence of financial technology (often called fintechs) has opened up the SME lending landscape as financiers leverage their predictive data analytics and pervasive networks to capitalize on lending opportunities and risk monitoring to an under-served market. Despite their contributions to the economy, access to finance for many SMEs is often challenging, creating barriers for future expansion and growth. Small and midsized enterprises (SMEs) are the engine room of many economies, making a significant contribution to gross domestic product and total employment.
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