What is an MSME?
The definitions of micro-business, small business and medium business depend on the country and who is defining the terms. In Australia, for example, a microbusiness (also spelled micro business and microbusiness) has one to four employees. Based on this figure, 89% of all Australian businesses are microbusinesses. Breaking this figure down, 61% of businesses are solo operations with no employees and 28% have one to four employees. The definitions of small and medium enterprises are:
- Small business – between 5 and 19 employees
- Medium business – 20 to 199 employees
- Large business – 200 and more employees.
Learn more about these definitions in What Is a Small Business?
In Australia, microbusinesses are often owned and managed by sole operators in roles such as accountants, bookkeepers, writers, web developers and coaches. So micro business owners are often specialists who sell their services on a contract or freelance basis.
The European Union has a different set of criteria defining these enterprises:
- Microenterprise – has fewer than 10 employees and an annual turnover of fewer than 2 million euros.
- Small enterprise – has fewer than 50 employees and an annual turnover below 10 million euros.
- Medium enterprise – has fewer than 250 employees and annual turnover below 50 million euros.
Given the size of the European market, it’s understandable that the criteria of micro, small and medium businesses include more employees and income than the Australian criteria.
What do these businesses have in common around the globe?
Although the definitions vary by country or region, MSMEs have some important commonalities. These include making significant contributions to their national economies and experiencing challenges in accessing finance.
According to the World Bank, between 200 and 245 million formal and informal enterprises do not have a business loan or overdraft but need one, or have some form of a business loan but still are constrained in getting the finance they need. In the developing world, it’s estimated that 131 million formal MSMEs lack access to finance. Learn more about the MSME Finance Gap.
In Australia, 74% of small businesses reported that they were rejected for a business loan in 2017. Banks often require a large amount of paperwork, including a business plan, as part of the application process. More recently, the Sensis Business Index revealed that 40% of SMEs had found it challenging to get the business finance they need.
Despite the lack of finance available to MSMEs, they make a major contribution to their economies. According to the International Council of Small Business, these companies account for 60 to 70 per cent of total employment and 50 per cent of global GDP.
In Australia, there are approximately 2.2 million MSMEs. These businesses have a massive impact on the economy, including:
- Contributing $615 billion to the economy, 57% of total GDP
- Employing 7 million people, 67% of all employment.
As 89% of all Australian businesses, microenterprises play a big part in contributing to these figures.
What can be done to improve access to finance for micro, small and medium enterprises in Australia?
The lack of finance for MSMEs has been an issue discussed by politicians, industry leaders and researchers. The Royal Banking Commission proceedings and report have led to a decrease in finance to MSMEs in Australia. Compounding this problem has been the decrease in residential housing prices, as many smaller businesses use residential property as collateral for business loans. In early 2019, some banks announced that they would no longer accept residential property as security for business loans. Other banks lowered their loan-to-valuation ratios for these loans, so small business owners are able to borrow less.
The RBA’s Access to Small Business Finance report, recommends a number of steps to improve access to finance. These include:
- Improving the financial capability of small businesses – smaller businesses need to be more financially literate. This includes using accounting software, understanding the factors that determine creditworthiness, and keeping up with tax obligations. According to research conducted by the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), 45 per cent of small businesses don’t use accounting software to keep up-to-date financial records.
- Provide lenders with better information to make lending decisions – this includes comprehensive credit reporting that would include ‘positive’ information about potential borrowers who are small business owners.
- Make it easier to use personal property as security – some market participants have suggested reducing the reliance on residential property by allowing machinery and equipment to be used as collateral.
- Establish an Australian Business Growth Fund – the Australian Government has suggested the establishment of a business growth fund that would encourage banks and superannuation funds to take an equity stake in small business. This model has worked successfully in the UK and Canada. Another proposal that has been legislated is the $2 billion Australian Securitisation Fund. The fund would buy packages of unsecured and secured SME loans issued by non-bank lenders and smaller banks. The increase in funding outside the big banks would make it possible for alternative lenders to increase their lending to small businesses.
Alternative lending as a solution to finance challenges
Businesses that have challenges getting business lending have been turning to alternative business lenders. In Australia, and around the globe, fintechs (financial technology companies) have been filling the gap in the market. After appearing in Australia in 2013, fintechs have been helping MSMEs to get business finance. In the first year, fintech lenders provided $10 million in loans to these businesses. By 2020, this amount is projected to reach $2.2 billion. Moula, for example, has been providing small business loans since 2014 and continues to grow as more businesses seek finance that’s quicker and easier to access.
Celebrating World MSME Day
The United Nations recognises the importance of small and medium businesses on Micro, Small and Medium Business Day and calls for raising public awareness about their contributions. It also calls for fostering research presentations, policy discussions, practitioner workshops and business owner testimonials from around the globe.