Stifled growth: the funding challenges facing French SMBs

In France, small and medium-sized enterprises (SMBs) employ over 4.3 million people across more than 159,000 businesses — a huge portion of the overall economy. In stark contrast, the country hosts only 5,600 mid-sized enterprises (ETIs) and fewer than 300 large enterprises (GEs). 

This discrepancy not only underscores the abundance of French SMBs, but also highlights how rare it is to grow from small, to medium, and beyond.

A significant barrier to this growth is the approach to short-term financing. SMBs struggle to secure loans and factoring services. And according to the European Commission, a quarter of European small businesses fail due to lack of short-term financing. 

So why these challenges? The administrative costs of serving SMBs and larger enterprises are similar, but the financial incentives to support larger entities are considerably stronger. 

This bias is throttling the potential growth of SMBs and partly explains the lack of medium-size enterprises in France.

The complexities of securing financing are made worse by the intensive process required—even for smaller loans—which includes in-depth background checks, phone calls, and face-to-face meetings. 

For SMB leaders, who typically lack the time and resources to manage these processes, this becomes a critical roadblock and, in some cases, jeopardizes the survival of the business.

SMB bankruptcies are at their highest levels since pre-Covid 

As the economy normalizes following Covid-19, micro-enterprise and SMB bankruptcies are back to their highest levels since before the pandemic. From January 2022 to January 2023 alone, over 56,000 French micro-enterprises and SMEs declared bankruptcy, marking a nearly 31% increase in failures year-over-year. 

Certain sectors have seen even sharper increases — IT and real estate experienced a 40% jump in bankruptcies, construction 36.5%, and auto repairs 28%. As noted above, the European Commission found that one in four SMBs fails due to a lack of short term financing, rather than to a failure of its business model. 

In a post-Covid, post-high-inflation period, innovative short term financing solutions are critical to support employment and sustain SMBs and mid-sized enterprises.

Why are (too many) French SMBs failing?

Obviously not all are. Plenty are thriving, and the sheer number of French small businesses proves that they’ll remain a pillar of the economy for a while yet.

But the trends are concerning. And the rise in failed SMBs can be attributed to a few factors. 

Inflation and unfavorable market conditions 

There’s less available money in the market. To combat inflation and normalize the market post-Covid, the ECB has increased rates by 4.5% since 2022. Which leads to less liquidity. 

That’s a macroeconomic phenomenon that we can’t magically fix. And it isn’t unique to France by any means. But we can support businesses better during this time. 

Making access to urgent financing faster and easier is crucial.

Reduced margins in this inflationary context

We see price increases in both the manufacturing and services industries, as well as increased salaries. And in sectors with historically tight margins and high competition, companies are less able to pass increased costs on to their customers. 

Payment delays

When customers don’t pay (or if payments come late), this puts real strain on SMBs’ ability to finance their own operations and growth. This is particularly challenging for companies supplying other businesses, where supplies are typically provided on credit. 

Payment delay times are actually coming down in France, but are still at a level the Minister for SMBs, Commerce and Crafts Olivia Grégoire considers “not acceptable.” The Observatoire des délais de paiement estimates the net impact on SMB treasuries was €8 billion in 2023.

Supply chain delays

We’ve also seen a reorganization of the global supply chain. Production has become more regionalized, and major geopolitical events have impacted maritime freight in the Black Sea and Red Sea. Plus, many producers simply didn’t survive the Covid crisis. 

If businesses can’t build their inventories, they can’t sell. Which means less money coming in, and even more stress on liquidity.  

How regulation and tech can better serve SMBs 

So what can the business and governmental spheres do to ease pressure on SMBs? A mix of regulation and innovation — often at odds — is needed.

Regulatory & political pressure

Companies and customers must pay suppliers on time. In France, regulatory and political pressure is already being applied:  

• Since 2018, 2,000 companies have been penalized for late payments, for a total of €157 million. €58 million occurred in 2023, a huge step up from 2022 and a clear indication of how seriously the French government takes the issue.
• Olivia Grégoire wants to substantially increase the fines companies receive for paying late.
• Since 2020, the Banque de France has integrated companies’ supplier payment behaviors in their credit scores.

We would also like to see French law (the Monetary and Financial Code) updated to ease the development of embedded lending solutions. 

Credit institutions and the finance sector need access to the e-invoicing system (Government Financial Informatics Agency (AIFE)), to fight fraudsters and encourage smoother trade. This would let financial services providers check that e-invoices are legitimate, and make e-invoice financing much simpler. 

Finally, we must encourage local authorities and ministers who recognize the current payment term delays to set up reverse factoring solutions with innovative and regulated partners. This could easily be done in conjunction with La French Tech.

But it’s not only the government and regulatory bodies who can force change. 

Fintech & banking innovation

The tech and banking sector has a part to play, too. Starting with bringing administrative costs down for small businesses. 

Compliance and background checks will always be vital, but these can be done faster (and often better) with well-built algorithms and automation. AI tools now let us read, verify, and extract information from thousands of documents at once. This means KYCs and risk assessments should take seconds, not days. 

At Defacto, we can assess eligibility and approve or decline new customers in 27 seconds (on average). And this capability is available to any financial institution, including banks. 

At the wider industry level, lending providers must hold each other accountable. Why is small business lending so difficult? If the issues come from administrative or compliance costs, let’s work together to bring these down. 

Innovation in banking has been seen as too slow for too long. And while progress has been made for individual consumers, business banking is lagging. 

But bank technology is trending in the right direction. We have the tools and knowledge to ensure that more business customers get the service they need. This ensures a healthy small business ecosystem, which means more customers to serve. It’s a virtuous cycle from which lenders stand to gain. 

Supporting small business strengthens all business

The global economy needs small businesses — France perhaps more than most. But tens of thousands of these companies close every year because they don’t have the environment they need to thrive. 

While SMBs have either been too costly or too time-consuming to serve in the past, this is no longer the case. A lighter administrative burden along with faster and simpler financing solutions can help SMBs react quickly and operate with lean efficiency. 

To get there, we need a mix of strong political will and focused innovation from banks and lenders. Serving small businesses is both noble and profitable, and the whole economy stands to benefit. 

We have the tools and the knowledge at our disposal. Let’s put them to use, and serve under-served SMBs better.