Lebanese Small businesses and Access to Finance
It’s very difficult to actually bring up the obstacles interrupting the growth of small businesses in Lebanon especially that they already suffered huge losses from the civil war. Unfortunately, these losses were neither covered nor did these businesses get help in the post-war era. However, knowing that difficulties are many, access to finance has always been the main problem for Lebanese startups. Reasons behind that vary from business to other, and of course they share some similar difficulties: the size of the business, lack of transparency and accurate financial statements, the family structure of almost all SMEs in Lebanon. Moreover, some difficulties are associated with the macroeconomic policies (fiscal and monetary policy), the banking sector, and the absence of financial culture. The Lebanese banking sector is suffering from high insolvency ratios after years of unhealthy interest rates, a sector fueled by an inflated real estate sector and an overvalued currency. Therefore, Lebanese banks don’t have the capacity to actually be a part of financing programs for startups with high potential earnings. The current monetary situation had undermined any possibility of financing SMEs through subsidized or even normal loans from the banking sector.
Small businesses: their size, management, decision-makers
The size of Lebanese small businesses influences the credit allocation more than one might think. Handicrafts businesses (from 0 to 9 workers) constitute around 87% of the Lebanese industrial companies. Those type of businesses suffer the most when it comes to getting funded by bank loans. The size of the company is usually associated with its economic power and its profitability and therefore is considered as risky. That’s why such businesses are subject to higher interests on loans. In addition to this, lack of transparency is shown when talking about financial declarations. Some businesses don’t declare financial statements yearly or they manipulate it.
When mentioning sources of financing, banks only contribute in 17.5% while self-financing’s share is around 80% and most importantly equity financing hardly makes it to 2%. Banks couldn’t contribute more in financing small businesses in Lebanon not just for the reason of high pricing when talking about loans or high level of collateral but also because decision makers in such businesses refused to accept the fact that lenders are willing to monitor day-to-day business activities. The family structure that dominates small businesses made financing really difficult. Owners refused equity financing in fear of losing control over the decision-making process or even sharing this process with external contributors.
Risk Criteria: Another Trouble
The risk acceptance criteria in Lebanon actually increase the credit rationing rather than make it more accessible for startups. The risk acceptance criteria fall under the general, financial, and security criteria. The first suggests the credit analyst knowing about the management depth and the business continuity of the firm. Surprisingly, 3 years of market experience is required which made it extremely difficult for small businesses to financially extend their operations.
The second (financial criteria) gives importance for the historical profitability, the financial structure of the firm, its turnover ratios, its repayment capacity, etc.
The third criteria deal with personal guarantees, tangible assets and other securities.
Obviously, the risk acceptance criteria are highly demanding and explain the low participation of banks in financing small businesses. And it also explains why the liquidity management is always a priority for small businesses in Lebanon.
Then what to be done?
In such a case when risk acceptance criteria are demanding, small businesses are mostly handicrafts, and self-finance can no longer promote more growth for the business, it’s the role of social entrepreneur to convince investors and funders in financing the corresponding business model. A group of social entrepreneurs, especially NGOs, should help small businesses get access to finance. Their role is to explore the business, understand what is it about, the market structure it is operating in, market competitors and their reach, the importance of the product in this specific economic environment, what faces the growth of the business? Etc.
In other words, social entrepreneurs should develop a plan that contains the potential strategy and goals of the concerned company, its opportunities and needs, its potential outcome and bring it all to donors and investors that can actually help the business achieve its goals. Besides, as we mentioned earlier, small and medium businesses contribute the most in terms of national employment. That’s a reason to never let this sector fails especially in this current situation where it’s extremely difficult for other sectors to generate income and employment due to the demand destruction imposed by high inflation rates, volatility in the black market, and labor costs. Therefore, small businesses if funded and managed correctly will be the dominant sector in creating jobs, generating income, and reducing the continuous deficit in the balance of payment through connections in the foreign markets.
By Sari Zeineddine