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Formal and informal small and medium enterprises (SMEs) are key players in forest-linked value chains, creating jobs, generating tax revenue, and meeting domestic and international demand for forest products and services. Appropriate investment, capacity building and management could have a multiplier effect on the sector, significantly increasing its outputs and benefits. SME development does not seem to be hampered by lack of potential investment funding, but rather by barriers such as ‘fear of risk’ by both financing institutions and SMEs, and SMEs’ ‘poor business capacity’. Innovative public finance mechanisms and public-private funding partnerships are needed to build business capacity of SMEs and attract private funding. Both public and private finance should include appropriate environmental and social criteria.