Big business often dominates the financial headlines every day, as journalists, investors and politicians seemingly track every single movement of the stock and bond markets. Yet when it comes to the U.S. economy, big business is only part of the story. One infrequently hears about businesses with less than 500 employees, yet in the U.S. they represent 99.7 percent of employer firms, have created over 65 percent of net new jobs from 1994 to 2009, and account for over half of nonfarm private GDP. These smaller businesses are often considered the lifeblood of the American economy, accounting for a good portion of innovation and often helping to give rise to the next generation of industry leaders. They have been a major driver of the economic growth of the U.S., as well as almost every major developed economy.
In developing economies, the story is somewhat different. Historically, a lack of investment capital and poor economic policies have generally suppressed the growth of these small and medium enterprises (“SMEs”). Their business owners are just like business owners in the United States – willing to work hard to expand their businesses, create real value for their economies, accept accountability for results and ultimately help contribute toward a better future for their families and communities. Unfortunately, they have historically had a number of obstacles hindering their growth, the most common of which is a lack of access to financing.
SMEs are the backbone of most economies, and have come to be known by many names in financial markets. “Small business,” “small-cap,” “middle market,” are some of the terms used to describe those firms that typically are profitable enough to have grown past the start-up phase, but yet not big enough to finance themselves in the debt capital markets. The definition of what qualifies as an SME can vary greatly from country to country, depending on the relative size of the economy and the sector under consideration. In the United States, the Small Business Administration (SBA) defines small business broadly as those businesses with 5 to 500 employees, a definition adopted for TriLinc Global.
The “missing middle” is a term generally used by economists to describe the lack of financing available to this vital portion of the global economy. It describes the typical situation in developing economies: the largest businesses typically dominate bank financing. Microbusinesses are primarily funded by microfinance institutions, which have helped this business segment grow over the last 20 years. Unfortunately, those small and medium-sized businesses in the middle often have a harder time accessing finance, with five out of six SMEs worldwide claiming a lack of access to sufficient capital, thus making up the “missing middle” of finance.