In Latin America, SMEs still have poorer access to finance, less favourable conditions and higher costs than large firms, despite the major improvements in the region in recent years. This gap hinders a greater contribution to development by micro, small and medium-sized enterprises, i.e. most production units in the region. The changes experienced by the Latin American financial system, particularly the shift from relationship banking to multi-service banking, have contributed to limiting access to credit for small and medium-sized enterprises (SMEs). Public financial institutions have contributed greatly to narrowing the financing gap, and recently new tools have proliferated to meet the needs of SMEs. However, for smaller companies to live up to their full potential they need greater access to financial and non-financial resources. There is ample space for public action through instruments and services to support (SMEs), a task that must involve national governments and the private sector. The region needs flexible, comprehensive public policies to finance businesses, with options for training, production linkages and innovation.

Introduction

Micro, small and medium-sized enterprises are the economy’s main drivers of productivity growth, job creation and a more diverse business structure. However, the importance of smaller firms in Latin America contrasts with the limited finance available to them. The level of finance is essential to understanding how these firms have developed in the region and for understanding their productivity levels, innovative capacity and integration into global value chains, among other traits. Also, the problems faced by SMEs in accessing credit and the unfavourable conditions under which they obtain it, compared to larger firms, remain some of the main obstacles preventing them from growing and developing. Before we can understand the nature of financing for smaller Latin American firms we must first analyse how the financial system has developed, what its structure is and which of its characteristics most affect financing mechanisms for SMEs. An appropriate, beneficial financial system is essential to spur growth in production, especially among SMEs in the region.1 

This chapter addresses the financing challenges of smaller firms in Latin America. The text is structured in four sections, followed by an appendix. The first section describes recent trends in access to finance, particularly how the credit model for SMEs has developed, and the factors that help explain the funding gap that affects smaller firms. Next, the chapter examines the role that public financial institutions such as first- and second-tier development banks and public guarantee funds play in lending to these firms and stimulating new sectors. The third section presents new financial and non-financial instruments that provide opportunities to improve finance, including access and conditions, for SMEs. The chapter concludes with a series of recommendations for public policy. These recommendations reflect the need for an integral approach that takes training, production linkages and innovation into account. Finally, the Appendix goes into greater detail on the structure of finance for firms in the region.