Vital contribution: Improving the operating environment for small businesses to expand


Small businesses are the backbone of Colombia’s economy, but the recent economic slowdown has hit them particularly hard. As in many other countries, micro-, small and medium-sized enterprises (MSMEs) face a range of challenges that are far less binding for larger firms that benefit from economies of scale.

According to Claudia Patricia da Cunha Tcachman, manager of dynamic ecosystems at Bancóldex, the five most pressing challenges facing SMEs include accessing credit, hiring the necessary human capital, defining a business plan, managing their financial structure and improving corporate governance. Relatively high rates of informality also pose a challenge. Firms and workers operating in the informal sector do not pay tax and, as a result cannot benefit from the social safety net. They also struggle to access credit from traditional sources.

BY THE NUMBERS: According to figures reported by the Colombian Confederation of Chambers of Commerce in local media, there are some 2.5m SMEs in Colombia, of which 94.7% are micro-enterprises, with less than 10 employees. A further 4.9% consist of small and medium enterprises with 11-200 employees. In fact, 60% of MSMEs are individuals operating as sole-traders. Moreover, the country’s SMEs are concentrated in the capital, Bogotá, and five departments: Cundinamarca, Atlántico, Antioquia, Valle de Cauca and Santander, which together account for 66% of all SMEs.

Julián Domínguez, president of Confecámaras, told local media that economic activity is concentrated in the main cities because these areas have a series of advantages for business development. Notably, these include better-qualified workers, more access to credit and enhanced support for innovation, all of which translate to increased formalisation and higher productivity.

According to the Ministry of Trade, Industry and Tourism, MSMEs account for 80.8% of all employment in the country, with micro-enterprises alone accounting for more than half. By contrast, micro-enterprises comprise just 6.3% of GDP, while 38.7% is generated by SMEs. Between January and July 2016 SMEs exported a total of $1.4bn, down 5.7% on the $1.5bn exported during the same period in 2015. The US was the top destination for these exports, accounting for $434.8m, followed by Ecuador with $131.6m. In the manufacturing sector, MSMEs represent 90.6% of all firms, account for 43.5% of all employment and 32.6% of all production, but generate only 27% of value added. This indicates that productivity is much lower in smaller firms.

PERCEPTIONS: In the first half of 2016 a joint initiative by the National Association of Financial Institutions (Asociación Nacional de Instituciones Financieras, ANIF), Bancóldex, the central bank and the Inter-American Development Bank – together with the support of Switzerland’s Federal Department of the Economy – led to the publication of a survey of SMEs in Colombia. The results of the survey established that SME owners perceived a deterioration in the economic environment and their firms’ prospects, particularly in the commercial and services sector. By contrast, SMEs in the industrial sector were experiencing more dynamism. Smaller firms were more pessimistic than medium-sized enterprises, although the overall trend was clearly one of deterioration. The survey results give a snapshot of SMEs’ opinions in late 2015, when the economy was still decelerating. While SMEs’ perceptions of the environment likely deteriorated as 2016 progressed and economy decelerated, they are likely to improve along with growth during 2017 and thereafter.

ACCESSING CREDIT: Getting the capital they need to grow is a challenge for smaller firms in Colombia, as it is in many countries. This issue is compounded by the relative lack of depth in the banking system, the high rate of informality and low levels of financial education. “A big challenge for SMEs is accessing affordable credit. If entrepreneurs can’t get capital from a bank, they will look for other sources,” Juana Téllez, chief economist at BBVA, told OBG. “Sometimes, these can be very expensive, and people don’t always fully understand the financial commitments they are taking on. We need to make it easier for small business owners to access credit and we need to invest more in financial education so that they can make an informed choice between various sources of credit.” To this end, Bancóldex offers a training programme for entrepreneurs to help them improve the financial management of their firms. According to the ANIF survey, the share of SMEs seeking credit from the financial sector increased by six percentage points to 46% in the second half of 2015, compared to the previous year. This suggests that entrepreneurs feel an improvement in the financing environment, despite the country’s weaker macroeconomic performance. At the same time, the proportion of SME loans in total business lending has risen sharply, from less than a third in 2007 to half by 2014. In September 2016 Rosmery Quintero, executive director of the Colombian Association of Small and Medium Enterprises, told local media that she attributed this change to the banking sector’s interest in increasing their portfolio of services available to SMEs, including through both traditional credit and other products. Factoring and leasing are beginning to play a greater role in SMEs’ finances, for example.

TAX REFORM: The December 2016 tax reform contained a number of measures that should contribute to the competitiveness of the private sector in general, and SMEs in particular. The reform eliminated a number of tax loopholes that benefitted larger firms. This increases the corporate tax base and allows for a phased reduction of the headline corporate tax rate, paid by all firms, over a number of years. This will benefit larger SMEs that operate in the formal sector, and are therefore subject to corporate income tax on their profits, but not large or powerful enough to have previously been in a position to benefit from the loopholes. “Smaller SMEs operating in the informal sector will benefit from the new monotributo, or simplified, tax,” Téllez noted. “Following the example successfully implemented in countries such as Spain, this will act as a single, flat contribution made by smaller firms to the public finances instead of direct taxes on wages and profits. This should encourage SMEs to formalise, which should, in turn, help them to access the capital they need to grow and expand over the longer term.”

The economic slowdown has affected the performance of Colombia’s SMEs, but there are encouraging signs, such as government initiatives, that suggest the operating environment is improving, notably with respect to formalisation and access to credit. As growth picks up during 2017 and 2018, the environment can be expected to become even more conducive to MSMEs.

Despite good progress, significant challenges do remain. An improvement in education and skills training will be important to ensure Colombian companies can hire the qualified workforce they need. Furthermore, efforts to improve the levels of financial education and managerial capacity among small business owners will be vital to the success of MSMEs in the long term.