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Global start-up financing, in 3 charts

In every part of the world, there are entrepreneurs struggling to get the capital they need to start or expand their businesses.

But which part of the globe has the most cash-strained small businesses?

Check out the map below, released during a recent alternative financing forum at George Washington University’s Annual Entrepreneurship Conference. This first one comes courtesy of Matthew Gamser, chief operations officer at the International Finance Corporation.

(Global MSME Finance Gap/Data and chart courtesy of IFC)

Key in on the green bars above, which show the percentage of micro, small and mid-sized enterprises (sometimes referred to as MSMEs) whose funding needs are not met by investors in that part of the world. It turns out, East Asia and the Pacific have by far the largest share of underserved entrepreneurs, with 92 percent of the region’s 188 million MSMEs reporting a dearth of capital.

In Europe and Central Asia as well as the Middle East and North Africa, conversely, the credit gap is much smaller, with only one in 10 MSMEs underserved. Granted, those regions combined have less than a fourth of the total number of capital-seeking businesses as East Asia and the Pacific.

Globally, approximately half of small businesses do not get the capital they need to either get off the ground or expand, Gamser said.

“There is still a gigantic gap between the demand for finance and the supply of finance, and while it’s true everywhere, but the magnitude is much greater in emerging markets compared to developed economies,” he said — which brings us to a second chart from the day, also from Gamser.

(Challenges faced by formal SMEs in emerging economies/Data and chart courtesy of IFC)

This one shows the most common challenges facing small and mid-sized businesses in developing economies, where political instability and fragile infrasturcture are often considered the major barriers to economic growth.

It would appear, however, a shortage of capital is actually the greatest challenge for entrepreneurs in emerging economies, with 16 percent reporting scant access to finance, double the number bemoaning political hindrances.

“We estimate that, in emerging markets, there is north of $2 trillion worth of good business that is being left on the table by the global financial sector,” Gamser said.

Often, it is not for a lack of capital, he added, but rather a lack of communication between entrepreneurs and potential investors.

“In emerging markets, the high-net worth individuals, those that would be qualified investors in the United States, for example, they have so many more barriers when trying to connect with the firms in need of finance,” Gamser said.

Meanwhile, some entrepreneurs simply do not understand the type of assets that can be valuable in today’s economy, according to Kenan Jarboe, president of Athena Alliance, a think tank in Washington. Often, business owners (and sometimes bankers) think only in terms of tangible assets like real estate, inventory and cash savings when searching for collateral for a commercial loan.

It is time to start thinking outside the box, Jarboe explained, pointing to the following data.

(Rising U.S. non-farm business investment in intangible assets/Chart courtest Athena Alliance / Data from American Economic Review)

The chart compares the amount of tangible and intangible assets used as collateral for investments in non-farm businesses over the past half-century. Roughly 20 years ago, as you can see, intangible assets surpassed the tangible as the most common form of leverage for a business loan.

So, what are intangible assets? It’s valuables like intellectual property (e.g. patents and proprietary software), trademarks and domain names, lease agreements, use rights, employment contracts and client contacts, Jarboe said. Even your company’s customer list, if extensive enough, can even help you secure financing from the bank.

“If John McCain had won the presidency, it would have been because of intangible assets,” Jarboe said, noting that McCain pledged his donor list as collateral on a $3 million loan when his campaign started running low on funds during the fall of 2007.

“These are all things you should be able to use as collateral to get a loan,” Jarboe told entrepreneurs in the audience. “But a lot of people don’t think of them.”

Follow J.D. Harrison and On Small Business on Twitter.

J.D. Harrison covers startups, small business and entrepreneurship, with a focus on public policy, and he runs the On Small Business blog.



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