As the world’s economy continues to be affected by a global recession, small and medium-sized enterprises (SMEs) face many challenges in staying afloat. Research reveals they are increasingly worried about the impact of the recession, with many being forced to lay off workers, reduce wages or even close down completely.
A recession can cause a decrease in consumer spending, which can result in lower sales for SMEs, exposing them to financial risk. This lack of capital can make it difficult for these businesses to cover expenses and maintain operations. Additionally, as larger companies tend to be better positioned to weather an economic downturn—according to research—SMEs may find themselves competing with more prominent companies for fewer resources in terms of financing, customers, employees and more.
Michael Hundeshagen, CEO of Sumaoptix GmbH, observed, “the biggest challenge SMEs face in a recession is cash flow,” in an interview. However, he added, “Many times, larger companies have access to resources that SMEs cannot, such as large amounts of credit or financial assistance from the government. This can make it difficult for an SME to stay competitive and meet its obligations.”
The key for SMEs in a recession, therefore, is to be proactive about maintaining their cash flow. They need to plan and prioritize, focusing on their core operations and ensuring they efficiently use the resources available to them. Consequently, Hundeshagen believes that it is essential for SMEs to adopt a proactive approach in times of economic difficulty. This could involve using technology to reduce costs, seeking government assistance and grants, or renegotiating supplier contracts and services.
Evidently, the most immediate challenge that many SMEs face during a recession is the risk of going out of business due to insufficient capital. So, to prevent closure, SMEs need to look for ways to cut costs, such as reducing staff, renegotiating lease agreements or suppliers, and taking other measures. A further challenge that SMEs may face is finding financing for new projects or to cover expenses. With banks tightening their lending criteria, as reported by The Telegraph, it can be difficult for SMEs to secure the funds they need.
One of the key reasons is their accounting information opaqueness which increases creditors’ costs in screening their creditability and monitoring. Research undertaken by Xing Huang and Xiaodong Wang of Portsmouth Business School and Liang Han of the University of Surrey finds that government should play a more active role in alleviating such an asymmetric information problem. This is primarily because the lending infrastructure has a determinant impact on SMEs’ accounting information transparency, which affects both SMEs’ access to finance and relevant costs for creditors. Such lending infrastructure includes informational, legal, judicial, bankruptcy, social, tax and regulatory environments. “The more transparent the lending environment is, the more cost-efficient it will be for creditors to assess and monitor SMEs, thus increasing their access to finance,” said Han in an interview.
The research reveals that government should invest in improving the aforementioned infrastructure and accounting standards to enhance SMEs’ access to external finance. Furthermore, the authors suggest that the government should provide financial subsidies to creditors, such as pension funds and venture capital funds, to reduce the costs of financing for SMEs.
The authors also call upon local governments to introduce policies which encourage financial institutions to lend more to qualified SMEs. “It is crucial that government provides incentives and assistance to financial institutions that are willing to provide finance for SMEs,” said Han.
The research offers policymakers and creditors valuable insight into the structure of external financing market for SMEs and suggests practical solutions to improve their access to external finance. It also helps SMEs identify the right institutions so they can make informed decisions when in need of finance. As Han concluded: “The whole SME financing system should be improved, and government should play an active role in this process.”
Consequently, government intervention is likely to be essential in assisting SMEs during a recession. Without the right infrastructure and support, these businesses may struggle to survive and thrive in a competitive economy. Governmental assistance should ensure that SMEs are able to access finance when needed and have the resources they need to stay competitive and meet their obligations. Without this, they risk becoming vulnerable or even being forced to close in a recessionary environment.
In conclusion, government should play a proactive role in helping SMEs access external finance, particularly during a recession. By investing in infrastructure and providing financial assistance to creditors, the government can help ensure that these businesses don’t face an uphill battle regarding financing their operations. In addition, policymakers should look for ways to incentivize lenders, making them more likely to provide SME financing. These measures could make a real difference in helping SMEs survive and thrive during difficult economic times. By doing so, government can help ensure that SMEs remain part of the global economy and contribute to economic growth. And, after all, that is the key to financial stability and prosperity.