Access to Finance can promote new Firm Entry, Growth and Innovation

Finance for All? Policies and Pitfalls in Expanding Access

Access to finance can promote new firm entry, growth and innovation

There is a greater availability of survey data for firms, and entrepreneurs in developing countries often list lack of access to finance as a major obstacle to their growth (Figure 2).

Data also indicate that less than 20 percent of small firms use external finance, about half the rate of large firms.

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Recent research using detailed firm-level data and survey information has documented that access to finance favorably affects firm performance along a number of different dimensions:

Access to formal financial services can reduce financing constraints especially for small firms and others who have difficulty in self-financing, such as start-ups.
Financial inclusion helps incumbent firms grow to their optimal size by exploiting investment opportunities.
Access to finance can help firms finance both product and process innovations.
Access to finance enables firms to choose more efficient organizational forms, such as incorporation, and more efficient asset portfolios.

Access to bank finance is typically the major source of external finance for firms of all sizes. Modern transactional lending trends suggest that improvements in the availability of information (for example through the development of credit registries) and technological advances in analyzing this information are likely to increase access for small enterprises. Provided the legal and regulatory frameworks are in place, asset-based lending techniques, such as leasing and factoring, can also help small firms gain access to external finance. However, relationship lending will remain important in environments with weak infrastructures.

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Access to Finance can promote new Firm Entry, Growth and Innovation