Alternative debt as a source of finance for SMEs
This chapter illustrates alternative forms of debt for SMEs, which appeal to investors in the capital market. The chapter covers "direct" tools for raising funds from investors in the capital market, such as corporate bonds, and "indirect" tools, such as securitised debt and covered bonds, which can be used by banks to transform SME loans in their balance sheets into liquid assets, and thus increase lending itself. The chapter provides details about the functioning of the different instruments, key enabling factors for their development, the profile of firms that are suited for corporate bonds, recent trends in alternative debt markets and policies to strengthen their development.
^Alternative forms of debt differ from traditional lending, in that investors in the capital market, rather than banks, provide the financing for SMEs. These include “direct” tools for raising funds from investors in the capital market, such as corporate bonds, and “indirect” tools, such as securitised debt and covered bonds. With alternative debt, the SME does not access capital markets directly, but rather receives bank loans, whose extension is supported by activities by the banking institutions in the capital market.
These instruments have existed for some time, but they can be viewed as “innovative” financing mechanisms for SMEs and entrepreneurs, to the extent that they have had until now been applied in a limited fashion to the SME sector.