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Small-business and startup financing

The government and private investors are taking steps to support startups and small and medium-sized businesses negatively affected by the Covid-19 pandemic in Egypt

Salma El-Nashar , Friday 21 Aug 2020

In the wake of the economic crisis caused by the coronavirus pandemic, many companies, especially small businesses and startups, have suffered badly from a lack of funding and cash flow, causing difficulties in covering operating costs and workers’ wages. 

As a measure to support them during the crisis, many governments worldwide have launched programmes that include short-term refinancing and the rescheduling of debts and investments into already planned funding rounds. For instance, France has launched a 4 billion Euro liquidity plan to support its startups’ cash flows, and Germany has announced the provision of billions of euros to help keep its young tech businesses afloat. Similarly, the UK has put an emergency loan scheme in place to support small companies.

According to reports issued by MAGNiTT, a community and data platform for regional startups, investors, and corporates based in the UAE, Egypt has maintained its first-place rank in the Middle East and North Africa (MENA) region in terms of the number of financing and investment deals directed to startups in 2019 and during the first quarter of 2020 after also being considered the fastest-growing emerging market in the region in 2018. 

Venture-capital (VC) firms, alongside angel groups and accelerators, are the leading sources of funding for startups in Egypt, and they are playing an increasingly key role in the startup ecosystem. The chance of high returns on investment is an important reason to invest in startups, and investors who take great risks in the early stages of any firm usually expect correspondingly great returns.

It is worth noting that what distinguishes small businesses from startups is the amount of innovation involved in the provision of products and services. Startups are meant to create something new and/or to improve what already exists, meaning that they often work in the field of the new technologies. 

In terms of the national economy, small businesses and startups also play significant roles in economic growth. One of their main advantages is that they can help to create new jobs and reduce unemployment and alleviate poverty, in addition to contributing to the diversification of economic activities that enhance innovation and creativity with relatively low capital requirements. 

Startups are also of paramount importance because their primary role is to provide local goods and services at competitive prices using technological systems, in turn increasing GDP and playing a vital role in enhancing economic growth. This is reflected in the high importance given by governments and public institutions to startups and small businesses, alongside VC firms.

The Small and Medium Enterprises Development Authority (SMEDA) in Egypt recently launched a loan programme to support small and medium-sized businesses affected by the current crisis, especially industrial and labour-intensive projects. The Financial Regulatory Authority has also taken measures in favour of microfinancing for companies, including the postponement, reduction or rescheduling of loan installments. 

In terms of legislative reform, parliament has recently approved a law that provides tax and non-tax incentives for small, micro and medium-sized enterprises, in addition to microfinancing for companies and entrepreneurs. These incentives include the provision of flexible financing, land and resource allocation and the expansion of technical, training and marketing services to companies to help them grow, create jobs and develop their activities. The law also exempts entrepreneurial companies from the patent-registration fees stipulated in the intellectual property law.

The new law has also expanded the definition of small, micro and medium-sized enterprises to cover a larger number of companies. Under the new law, a small enterprise is one having an annual turnover of more than LE1 million but less than LE50 million, and a medium-sized enterprise is one having an annual turnover of between LE50 and LE200 million. The definitions have also become much wider to include more youth-led enterprises and entrepreneurs. 

However, despite these efforts, impressive as they are, further efforts are still required to help small businesses and startups to recover quickly from the present economic downturn and to face up to its challenges. These companies and their workforces are still in need of the kind of financial support and incentives that will help to keep them alive in the present critical situation.

More funding and support for these enterprises will not only benefit them and mitigate their losses but will also have wider positive economic impacts. Innovation and creativity are always an important part of the solution, with, as the Italian businessman Giorgio Armani once said, “new opportunities always being born from the deepest moments of crisis.”

The writer is an attorney at law.



*A version of this article appears in print in the 20 August, 2020 edition of Al-Ahram Weekly

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