> Posted by Christy Stickney, Independent Consultant and CFI Fellow

After decades of directing financial services to micro-enterprise owners, many microfinance institutions are finding that some of these enterprises have grown and that they’re now serving an expanding number of small business owners. With increasing global attention being directed to small and medium-sized enterprises (SMEs), it is fitting to look more deeply at what can be learned from entrepreneurs whose businesses started as microenterprises, grew, and can now be classified as SMEs – with a substantial number of employees. More specifically: Who are these entrepreneurs? What kinds of businesses do they operate? What have been their growth patterns and hurdles? And how have they utilized financial services to further their growth aspirations?

These are the questions that guided my research fellowship for the Center for Financial Inclusion. As part of my study I gathered institutional data and conducted in-depth interviews with clients of three leading microfinance institutions in Latin America: MiBanco, Banco ADOPEM, and Banco Solidario. The clients I focused on had all experienced significant loan size growth over several years.

As one might expect, the emergence of SMEs from microenterprises is disappointingly low within microfinance portfolios. Data I gathered suggests that these “emerging SMEs” represent less than 2 percent of the total clients of the institutions studied. Clearly, businesses arising out of contexts of poverty and marginalization face greater obstacles to growth, raising the question of how these ratios can be increased through targeted financial services, advising, or support.

Why do these entrepreneurs and their enterprises merit our attention – especially given that they represent such a small segment? They are extremely strategic for two reasons. First, these emerging SMEs are generating tangible benefits for their owners and their extended families, employees, and the local businesses from which they buy and sell, directly contributing to poverty alleviation within their lower-income communities. In addition, they show us how businesses can grow within marginalized settings, what qualities or characteristics contribute to growth, and what the common hurdles are that growing enterprises need to overcome.

Introducing “Growth Entrepreneurs”

“Growth Entrepreneurs”, as they are labeled in this study, were identified as those who operate high growth businesses, overcame significant growth hurdles, and express a clear vision for future business growth. More specifically, Growth Entrepreneurs may be identified as:

  1. Visionaries – They express a clear vision of growth for their business.
  2. Employers – They effectively involve non-family employees in their business.
  3. Focused – They devote their time and resources to growing only one business.
  4. Organized – They keep financial records and increase administration as their business grows.

By directing financial services and business development support to Growth Entrepreneurs, financial institutions, governments, investors and organizations supporting entrepreneurship development may strategically focus their efforts on a category of emerging SMEs that hold great potential for future growth and job creation.

Enterprise Growth Progression – Overcoming Hurdles

Enterprise growth does not necessarily follow a defined path or progression, but may best be described as a series of hurdles that must be overcome in order to reach higher stages of development. Through this study I’ve identified four common hurdles encountered as microenterprises progress into SMEs:

  1. Acquisition of fixed assets: This common growth step involves larger purchases such as vehicles, machinery, equipment or furniture, and it becomes a hurdle when necessary financing is unavailable.
  1. Incorporation of non-family employees: An important growth step is reaching beyond the pool of family members to employ outsiders, and assuming the associated costs and risks. An entrepreneur’s will and capacity to manage employees is fundamental to overcoming this hurdle, along with financial and administrative systems that support this growth.
  1. Securing a strategic business site: While microenterprises often begin in small, informal and sometimes precarious locations, including street corners, informal markets and borrowed rooms of family residences, growth usually implies increasing space to accommodate additional inventory, equipment, employees, or customers. Improved security, visibility, and access for customers are further reasons for relocating to a more strategic, permanent, and safe site. This step requires a significantly larger investment than acquiring fixed assets, thereby presenting an even greater hurdle.
  1. Expansion to additional sites: Growing enterprises will often extend their physical presence to added locations to create access to new customers. This is a growth step that requires not only substantial capital to acquire and equip a new site, but also increased management and administrative capacities to effectively oversee multi-site operations.

Financial services and business development strategies that assist emerging SMEs in overcoming these critical hurdles are likely to contribute to higher rates of microenterprises transforming into SMEs, positively impacting poverty in the communities where these operate.

For more findings on Growth Entrepreneurs , read the new paper “Emerging SMEs: Secrets to Growth from Micro to Small Enterprise”. And stay tuned for upcoming blog posts on the role of women in these enterprises, and on Mercedes Canalda, Executive President of Banco ADOPEM discussing the pertinence of this study for her institution.  

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