Emergency relief for small businesses requires a targeted approach

Written by Sai Krishna Kumaraswamy and Gayatri Murthy of CGAP


©CGAP/Mohamed Faisal

Micro and small enterprises (MSEs) have an outsized influence on the economies of most countries, representing 90 percent of all businesses, 66 percent of all jobs and 50 percent of the world’s GDP. They are especially influential in emerging markets. Yet economic lockdowns are disproportionately affecting millions of these companies. Support for small businesses has been the centerpiece of many countries’ economic responses to the COVID-19 (coronavirus) pandemic, but despite the best of intentions, these programs have run into challenges when they do not reach the right small business segments with targeted relief measures.


There are many examples of this. In the United States, funding under the Paycheck Protection Program flowed to areas that were less adversely affected by the pandemic, loans meant for small businesses went to publicly traded companies and the $350 billion program ran out of funds within days, prompting a second round of support.


India recently announced a $50 billion package to rescue micro, small and medium enterprises, but most of this support was in the form of credit guarantees. Additional financing was limited to 20 percent of existing debt and excluded loans that already were nonperforming. While these measures are likely to benefit around 5 million firms in the short run, most of India’s 63 million small businesses are in the informal sector and do not have access to credit. Similarly, the $2.6 billion Bangladesh has provided in working capital to small and medium enterprises focuses on formal, export-oriented firms, with no allocation for an informal sector that employs 87 percent of the workers in the country.


These are unprecedented times, when perhaps any prior relief program would be inadequate, but a central problem is the tendency to treat small businesses as a monolith rather than developing segmented relief measures.


Micro and small business are not all the same


There are more than 160 million formal MSEs in developing countries and an equal, if not greater, number of informal firms. They vary a great deal in their size, profitability, resilience and financial needs. Targeting relief to every type of SME during a pandemic would be expensive and impractical, but if policies are guided by a segmented approach to MSEs, they can be more inclusive and impactful. Here are some useful ways of segmenting small businesses to channel COVID-19 relief efforts:


  1. By size. Size is usually defined using some combination of turnover, value of assets and number of employees, among others. Many of the common tools in the economic response to COVID-19 — additional financing facilities, wage subsidies, tax relief and debt forbearance — are skewed toward relatively larger firms in the formal sector. Most microenterprises are informal household enterprises; they rarely pay taxes or employ people outside of the household and have limited access to credit from financial institutions. Therefore, they are likely to be excluded from most relief packages. Several small enterprises are already credit constrained and suffer from a collapse in demand. Even if additional financing helps them stay afloat and pay expenses, they run the risk of becoming over-indebted or defaulting. It is vital that governments design appropriate economic relief packages catering to the unique needs of informal MSEs.

  2. By entrepreneurial capabilities. Access to credit is not a panacea: it does not create growth for most microenterprises. Most people take up microenterprises out of necessity and for subsistence, but there are some with entrepreneurial ability who run their business with a growth and expansion mindset. Research has repeatedly shown that credit has greater impact when targeted at these high performers as opposed to the average microenterprise. This distinction has consequences for COVID-19 relief efforts. Subsistence microenterprises most likely will be better served by liquidity infusions through social safety net payments rather than by credit infusions through financial institutions.

  3. By gender. Women-owned enterprises are disproportionately vulnerable to COVID-19, as they tend to be small, informal and concentrated in the retail and services sector. Women are also less likely to have a bank account while restrictive social norms and legal and regulatory barriers make it hard for them to access finance to fund the growth of their enterprises. Moreover, research shows that money given to female entrepreneurs is often not invested in their own businesses but is instead invested in their spouses’ enterprises. COVID-19 response packages need to consider the unique risks faced by women entrepreneurs to ensure that the relief is well targeted and effective.

  4. By sector. Although all sectors of the economy have been affected by the pandemic, some are suffering more than others. As global supply chains come under increasing pressure, microenterprises in the farm, transport and essential retail sectors may expect a quicker and sharper economic recovery as lockdowns ease. They may benefit from measures to help firms preserve liquidity and social protection payments. Microenterprises that are part of essential goods and services value chains may require additional financing to expand the production or delivery of services, and they are likely to benefit from additional financing and guarantee schemes. Finally, there are microenterprises in sectors that may take a long time to recover or may not even survive the crisis, such as the nonessential retail and tourism industries. Firms in these sectors may require long-term economic response packages that include social protection, advisory services like technical assistance, re/upskilling and capacity building and policy support on insolvency and debt restructuring.


Segmentation will drive recovery and impact


A differentiated approach to COVID-19 relief will be crucial in helping MSEs recover and rebuild.  CFI and BFA are conducting vital research to enable governments, funders and financial services providers to provide more tailored relief. Additionally, segmentation is important beyond COVID-19. CGAP will be focusing on embedding a segmentation approach in the design and delivery of financial services aimed at increasing the incomes, growth and productivity of MSEs.

This article was originally published by CGAP.

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