The true size of the SME market is understated due to informality. The aforementioned number of SMEs that are inscribed in the commercial registry of the chambers of commerce should be thought of as a lower bound estimate since they comply with the minimum requirement for being formal. Although both the definition and measurement of informality are complex issues, existing studies have estimated the size of the informal economy in Colombia between 35 and 44 percent of GDP, a figure that has apparently grown over the past decade<sup>10</sup> . This implies that a large proportion of firms (mostly micro enterprises, but also SMEs) is not captured in the official statistics<sup>11</sup> . While informality may confer firms with some advantages such as the ability to avoid paying taxes and social security contributions, it limits their possibility of receiving credit or accessing government support programs.

# **2.2 SME Financing Patterns**

Lack of access to finance has been cited as an important problem for SMEs. While information on the financial performance and capital structure of SMEs is generally unavailable, existing surveys by Fundes, Fedesarrollo and ANIF indicate that supplier credit and bank borrowing (including leasing) are the main sources of external SME financing. Based on a 2003 Fundes survey of 687 SMEs whose results are summarized in Rodriguez (2003), access to finance was ranked the second most important constraint (particularly for smaller, industrial and younger firms) in the creation, development or diversification of their economic activities<sup>12</sup> . Within the access to finance category, credit conditions – relating primarily to interest rate, maturity, collateral requirements and lending procedures – were perceived to be the most important limiting factors. The perception of an inferior access to credit by small firms is also documented in surveys on credit conditions that were organized by BdlR between 2001 and 2005<sup>13</sup> . According to a recent government document on this sector (CONPES 3484 of August 2007 – see below), SMEs cannot access sufficient long-term borrowing to allow them to modernize their operations, while they lack alternative non-bank financing sources. Partly as a result, some SMEs resort to the use of informal lending sources – either the owner’s family or the so-called “ _mercado extrabancario_ ” – to finance their activities; according to ACOPI’s survey, the latter financing mechanism is used by around one-fourth of SMEs.

There are significant differences in perceptions as to the size and causes of the SME financing gap nowadays. While there is strong evidence to support the existence of an SME financing gap following the 1999 crisis, the significant growth of this market in recent years raises some questions as to whether such perceptions remain valid.

> 10 See Cárdenas and Mejía (March 2007) for an overview in the case of Colombia, and Perry e _t al._ (May 2007) for a regional perspective on the causes and implications of informality.

> 11 According to the micro enterprise survey (“ _Encuesta Microestablecimientos_ ”) regularly undertaken by DANE, around 40 percent of such firms are not inscribed in the commercial registry of the chambers of commerce, have not paid taxes, and report no financial statements, while two-thirds of such firms have not contributed to the social security system on behalf of their employees.

> 12 In fact, individuals surveyed from the “supply side” (i.e. government, academia, associations and nongovernmental organizations) ranked access to finance as the most important constraint for SMEs. 13 See Murcia and Piñeros (March 2006) for more details.

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