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Financing key to growth of SMEs

FINANCING for small and medium enterprises (SMEs) is key in promoting the development of this sector as it is seen as a potential contributor to Malaysia's economy. The Government and various financial institutions are now paying greater attention to this sector as it has the ability to grow into a more dynamic segment of the economy and increase the country's foreign reserves.

 

Promoting SMEs growth is one of the important thrusts to support the Government's aim of achieving a balanced economic development and higher standards of living.

Various initiatives have been undertaken to widen the avenues of financing to SMEs to ensure that they are able to obtain the necessary amount of funds at various stages of their business life-cycle.

To date, initiatives to improve access to financing for SMEs have shown encouraging results. In 2006, a total of RM46.5bil loans were approved to more than 102,000 SME accounts by both banking and development financial institutions (DFIs).

According to the 2006 SME Annual Report, these financial institutions were expected to approve a total of RM51bil loans to about 110,000 SME accounts last year.

In 2006, RM48.1bil of financing was provided by the banking institutions, DFIs and other agencies to 240,000 SMEs.

A total of RM46.5bil worth of loans were approved to more than 102,000 SME accounts by both the banking institutions and DFIs in 2006. Banking institutions were the main provider of funds to SMEs, with a total approval of RM39.6bil to more than 84,000 SME accounts.

Reflecting an increasing trend, loans to SMEs from banking institutions had risen from 31.1% of total business loans in 2000 to 44.5% in 2006. Total SME outstanding loans from banking institutions breached the RM100bil level in 2006.

The success of many smaller companies including SMEs, among others, depends on the efficient management of working capital (WC).

WC is a measure of both a company's efficiency and its short-term financial health. Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital, on the other hand, means that a company is currently unable to meet its short-term liabilities with its current assets.

If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is bankruptcy.

HSBC Bank Malaysia Bhd director for global payments and cash management Jason Tan said with the global inflation and credit market tightening, companies including SMEs were finding it difficult to obtain loans or manage WC efficiently.

Although Malaysia was relatively quite insulated compared with other countries, this trend was slowly creeping into the country, he added.

“This has led SMEs to be squeezed on both ends – the difficulty in getting loans to finance their collections on one end, and to make their payments on the other end. They should work closely with their banking partners on how to manage their collections and payments efficiently,” he added.

According to Tan, some banks now provide earlier financing to SMEs who are waiting for their collections from buyers. This sort of financing allows faster collection for SMEs although the financing would be at a discounted amount to the original sum that buyers owed them.

Apart from the above trend, banks are also playing a more proactive role in providing advisory services to this sector. This includes short messaging service (SMS) and e-mailing to buyers on behalf of SMEs for payments and collections.

HSBC Bank has recommended five tips for SMEs to shop and ensure efficient WC. Firstly, they should start to take advantage of early payment incentives offered by its business partners.

Secondly, they should stretch out their payable period and maximise it if possible. Thirdly, they should organise and have systematic billing schedule to ensure faster collection, hence the ability to grow their business faster.

Fourthly, they need to have better control of their inventory to help improve cash flow and lastly they need to check their pricing and hike it if possible in accordance with the global economic indicators. For more details contact: 1800 88 3898. - The Star

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