While many businesses have the technical capability to produce inherently valuable intellectual property, or to provide products and services of a unique type or quality, they may not be able to reach their full commercial potential unless they can attract the capital necessary to finance the required resources.
The shortfall between the finance available to small and medium enterprises (SMEs) and the finance that they could productively employ is referred to as the ‘funding gap’.
The funding gap exists because SMEs are often considered less attractive investment opportunities compared to governments and large companies, due to their comparatively high perceived levels of uncertainty and risk. Generally, SMEs do not possess the accounting data, financial expertise, operational controls, or collateral required to raise traditional financing.
At the same time many SMEs are simply too small to access private equity (who typically require annual revenue in excess of $20 million and/or an EBITDA of at least $4 million), and nor are they necessarily from the technology driven, hyper-growth sectors that attract venture capitalists.
Accordingly, it is estimated that the total unmet demand for credit by all formal and informal SMEs is US$3.5 trillion, a third of it in OECD countries and the balance in emerging economies.
In order to access the capital necessary to bridge the gap between being an SME with clever intellectual property to a market influencer, most SMEs would require (but cannot afford) executive level resources who can identify and deliver the operational, financial and strategic initiatives that attract professional investors and trade buyers.
Funding gaps for smaller firms are a major impediment to growth. Wide variance in the profitability, survival and growth of SMEs compared to larger firms brings special financing problems. Owners and managers of smaller firms often lack commercial experience and/or a track record as entrepreneurs. [OECD]