# **2. SMEs and Their Financing in Colombia**

## **2.1 What Is an SME?**

The legal definition of SMEs in Colombia is based on a firm’s assets and number of employees. According to the so-called _Ley Mipyme_ (Law 590/2000) as amended by Law 905/2004, small firms are defined as those with assets of 501-5,000 legal minimum monthly salaries (around US$0.1-1.1 million) and 11-50 employees, while medium-sized firms are those with assets of 5,001-30,000 legal minimum monthly salaries (around US$1.1-6.7 million) and 51-200 employees. As discussed below, this definition does not correspond to actual banking market practice that is based on firms’ turnover, an indicator that often represents a better proxy of an SME’s level of business activity and prospects than its assets or employees. However, according to article 84 of the recentlyapproved national development plan ( _Plan Nacional de Desarrollo_ ) for 2006-2010 _,_ the government has the authority to introduce sales as an additional classification criterion and to change the relevant size ranges as deemed necessary.

SMEs represent an important part of the Colombian economy, although they are not well documented in official statistics. The main official source of information on SMEs is Colombia’s statistical agency DANE ( _Departamento Administrativo Nacional de Estadística_ ). Although the Superintendency of Companies ( _Superintendencia de Sociedades_ ) also collects detailed financial information on firms, it does not gather data below a minimum threshold size that excludes the vast majority of SMEs. According to DANE’s 2005 census, SMEs represented around 3.5 percent of all Colombian firms, employed around 30 percent of the labor force, and were divided in the ratio of 19-22-59 percent between the industry, commerce and service sectors respectively. By contrast, 2004 data of the Colombian confederation of chambers of commerce ( _Confederación Colombiana de Cámaras de Comercio_ or Confecámaras) shows that around 57,000 registered firms could be classified as SMEs based on their asset size (small firms represented 81 percent of that total); these accounted for 7 percent of the total number of firms and assets, and were divided 7-22-33-38 percent between the agricultural, industry, commerce and service sectors respectively<sup>8</sup> . The difference in results potentially stems from the fact that the DANE census covers a larger sample of companies including informal ones, but this hypothesis has not been tested. While DANE collects data by economic sector in addition to the census, it is difficult to compile this information by firm classification. As a result and in spite of the _Ley Mipyme_ and the existence of government programs to support this segment, there does not exist sufficient periodic data as to SME characteristics, evolution, or overall contribution to the Colombian economy – in most cases, SMEs tend to be bundled together with micro enterprises in official statistics. The issue of insufficient information on SMEs has been discussed for some time but has not yet been resolved<sup>9</sup> .

> 8 Based on 2001 Confecámaras data, Rodriguez (2003) finds that one-half of all SMEs were based in Bogota and that their median age was around fifteen years.

> 9 In response to the perceived information gap, ANIF, in collaboration with CAF ( _Corporación Andina de Fomento_ ), the Colombian central bank ( _Banco de la Republica_ or BdlR) and Bancóldex, began a bi-annual survey in 2006 of the SME market – based on phone interviews with around 1,600 firms involved in industry, commerce and services – entitled “ _La Gran Encuesta Pyme_ ”.

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