Setting up small and medium-size enterprises for restart and recovery

McKinsey & Co | By Abdulaziz Albaz, Tarek Mansour, Tarek Rida, and Jörg Schubert | Jun 9, 2020

Help SMEs recover 1 - Setting up small and medium-size enterprises for restart and recoverySmall and medium-size enterprises are a critical engine for the global economy. In the wake of the pandemic, governments can take four actions to maximize the impact of existing support measures.

Governments’ economic responses to the COVID-19 pandemic have included an array of measures to help people and businesses weather the storm. Small and medium-size enterprises (SMEs) are in an especially difficult position. Plunging demand has forced them to lay off workers, and many don’t have the financial resources to survive in this climate. In many countries, up to one-third of SMEs could go bust within three months of when the pandemic began in their countries. 1 But their viability will be critical to any postcrisis recovery: SMEs account for two-thirds of global employment and half of global GDP. A failure to protect them could put the entire global economy at risk.

Since the onset of the pandemic, governments have implemented a sizable number of programs aimed at addressing the needs of SMEs. The overarching goal has been to provide business owners with critical funds and support in the immediate term. These actions are critical, but to maximize their impact, policy makers could consider four additional actions: easing SME access to government support, enabling the support ecosystem through an ‘SME nerve center,’ sharpening focus on building sustainability and resilience, and replanning for the next normal.

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SMEs have the potential to be an economic and employment engine after the crisis, but an effective government response now will be critical. The prospects of an eventual recovery depend on it.

Why SMEs are more vulnerable to the crisis

While all companies have had to quickly adapt to disruption and greater uncertainty, SMEs are particularly susceptible. Three factors increase the potential fallout from the crisis for SMEs compared with larger companies.

Plunging demand and liquidity challenges:  Demand has declined dramatically since the onset of the pandemic. According to 15 surveys in Organisation for Economic Co-operation and Development (OECD) countries, more than half of SMEs already face severe losses in revenues, with many having only a few months of reserves. In Portugal, 37 percent SMEs reported a more than 50 percent drop in production. 2 At the start of the outbreak, two-thirds of SMEs in China reported having enough cash to cover fixed costs for no more than two months. In the United States, an average small business has only 27 days of cash flow. This combination of factors puts SMEs in a vulnerable position and many face risking a permanent closure.

Inflexible supply chains and operations:  SME management teams don’t have the bandwidth that large companies have in core functional areas to manage commercial pressures and respond to the pandemic. This lack of capacity manifests itself in an inability to quickly adapt their supply chain and production processes. SMEs frequently source inputs from supply chains that have become longer, more complex, and more global.

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The pandemic has disrupted these supply chains, leaving many SMEs without the materials they need to maintain operations. In addition, measures meant to slow the disease’s spread have also disrupted SME production processes. Factory floors of small enterprises are not designed for physical distancing, and the companies typically do not have the expertise and resources to quickly reconfigure their operations.

Disproportional SME representation in hardest-hit sectors:  According to our analysis, some industry sectors will be hit harder than others in the crisis and will take longer to recover due to long-term demand and supply disruptions. These sectors, which include retail, hospitality, food service, entertainment services, and construction, have an overrepresentation of SMEs due to the local nature of the demand and lower barriers to entry. For example, in the OECD, 60 to 70 percent of SMEs do business in these sectors, making SMEs more affected by the crisis.

Four actions to elevate impact of existing measures

The scope of the pandemic and the resulting economic fallout have led many government officials to question whether their response to date is sufficient to protect SMEs and provide the foundation for a recovery. The goal is to get the greatest possible impact from existing efforts and set up SMEs for a stronger recovery after the crisis.

In our experience, four actions are critical. The first two focus on the immediate response to the pandemic, the last two on how SMEs can emerge stronger.

1. Ease SME access to support

To increase SMEs’ participation in response measures, policy makers should work directly with them, helping them identify the right assistance programs, navigate application processes, and secure assistance. Countries that have successfully carried out such interventions have established a single, integrated point of contact for SMEs. For example, the Australian government built a dedicated website section with information for businesses about available support measures and set up an SME hotline.

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Once informed of the most relevant support, SMEs need fast and easy access to services. For example, loans, grants, and guarantees that require elaborate applications can be deterrents, especially for the smallest enterprises, which don’t have the staff or resources to dedicate to lengthy submission processes. By easing administrative processes, governments can increase SME participation in assistance programs. For example, the German state of Bavaria offered immediate aid of €5,000 to €30,000 to affected SMEs. Similarly, the Business Development Bank of Canada (BDC) offered a small-business loan of up to CA $100,000 that can be obtained online within 48 hours from time of approval. 3

2. Orchestrate and focus the support ecosystem through an ‘SME nerve center’

SMEs now need comprehensive support. To maximize the impact of government response measures, governments should create an ‘SME nerve center’ to serve as a single orchestrator, activate the full ecosystem, and ensure that all efforts are aligned with the overarching goals. Necessary first steps include addressing the interests of different parties, increasing information accessibility, and matching demand with supply.

In addition, the SME nerve center can act as a control tower that closely monitors the uptake and impact of programs and establishes a feedback loop. These insights enable policy makers and SME-support-ecosystem participants to adapt rapidly and focus their assistance. Currently, most governments are unable to track progress, which creates blind spots that limit their ability to take corrective action to enhance the effectiveness of programs. The nerve center also provides information about SME participation in government support programs at the segment and regional levels; these insights are essential to mobilizing the relevant ecosystem stakeholders.

3. Sharpen focus on building sustainability and competitiveness

The speed of recovery will depend on the ability of SMEs to return to sustainable operations post crisis after current stimulus measures run out. Policy makers should direct their focus to delivering three foundational interventions that are of highest impact and relevance to SMEs: access to local demand, support for internationalization, and enhancement of productivity.

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First, SMEs’ share in public procurement remains lower than it should be in many markets. Public procurement remains the avenue for sustainable SME development with the most impact, given its share of total demand (for example, 30 percent in OECD countries and more than 50 percent in developing countries). Governments can consider easing administrative burdens that have limited SME participation in public procurement to date. For example, South Korea’s Ministry of SMEs and Startups has implemented a measure to simplify the processes and administrative burden in public procurement by limiting on-site inspections. Governments in many countries have offered advanced payments for procured services and goods.

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