Sunday, April 5, 2009

SMEs - should governments be bailing them out during the 2009 financial crisis?

Firstly I want to categorically state that I am an SME owner myself.

Secondly my answer to this question is a definite NO. Many people will query my position on this question but let me explain my position.

All economies are cyclical with good times and bad times. A recession is just a bad time that is worse than the normal cyclical bad time. Hell yes, it is difficult to survive a recession, and many SMEs will not make it. But then again many large businesses will not make it either.

Should governments be helping them all? In my mind this is a socialist approach that merely sustains, at best, mediocre businesses. All businesses are able to access the same information and market intelligence. If a business is not sufficiently opportunity aware, nor innovative enough to adapt, or resistant to change, then they deserve to make way for those businesses that are.

Sure it is difficult for those who crash and burn, at a personal, financial and psychological level. However, the true entrepreneurs will bounce back. Those that do not, do not deserve to be there.

All businesses are equal in principle. The difference lies in the management thereof, and if management fails to manage correctly they must be allowed to fail.

A recent article I read showed how a number of todays large successful businesses started during the Great Depression.

A business I am aware of were advised to reduce staff. They did so partially and then promptly re-employed, because the management were weak. The recession started to grip and new investors terminated more than 50% of the staff day 1 (among other things). Tough times for those staff, but the business will now quite likely survive. Good management leads to survival and success.

So I say to governments that the secret is not to throw good money away giving it to businesses that are quite likely to fail any way. Use that money to address the structural hole that exists which minimises bank lending to SMEs. Close the hole and increase the flow of funding to SMEs and then only those businesses that are likely to succeed will get funding and continue. This will be at a greatly increased level to current funding for SMEs but will be done purely on a commercially viable lending basis. Fund research into closing this structural hole, so that banks can lend with reduced risk.

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