Wednesday, 17 April 2013

Credit For SMEs

Apart from growing their business, the main problem facing SMEs (Small and Medium-Sized Enterprises) is finance.  This is often the “make or break” factor in whether an SME “hits the big time” or not.

SMEs regularly complain about how difficult it is to obtain credit from banks.  The latter, unfortunately, aren’t always equipped to support SMEs.  Some of the problems include: 

·         Lending $100,000 to an SME can be more difficult than lending $1million to a “large company”, even though the amount “at risk” is less;
·         People may take more “on trust” when looking at requests for large facilities for large companies whereas SMEs (who generally needed a tiny fraction) are gone over with a fine tooth comb;
·         The risk of an SME folding is that the bank loses a smallish amount of money; if a large company folds, losses could be substantial;
·         SMEs often have to provide proportionately more security than large companies;
·         Pricing for large companies is finer than for SMEs, so it may simply be too expensive to borrow, even if repayment is assured;
·         Risk monitoring for SMEs is tougher than for large companies (you don’t have all those lovely ratings agency reports or press comment);
·         New capital rules and greater regulatory oversight make it more difficult for banks to lend;
·         Relationship Managers are centralised into area credit “hubs” and aren’t close enough to their customers to really know them;
·         Relationship Managers may have little authority – lending decisions depend on committees. 

So why is there this disconnect between banks and SMEs?  In my experience, some of the causes are:

History:
Many SMEs are comparatively young and don’t have track records to which they can point.

Management:
SMEs generally rely on one or two key people for their success.  Larger companies can spread the load (and therefore reduce the risk of the loss of a “key person”).

Finances:
Banks like audited accounts from reputable firms.  SMEs often don’t use “Big 4” auditors to provide these.  

Repayment:
Banks lend because they assess that the chances of getting repaid (at a profit) are higher.  With SMEs, this judgement may be more difficult.

Security:
SMEs may have little to offer in the way of security, short of the MD’s own residence.

Profitability:
SMEs (as mentioned before) tend to borrow less than large organisations and so aren’t as profitable as larger ones.  Banks have to look at how much they earn for the effort they put in and the risk they take.  SMEs require more effort and are seen as higher risk for the same (or usually, lower) returns.

Cost-Cutting:
Banks have moved credit managers into central hubs to save costs/improve efficiency, at the expense of customer relationships.

Communication:
The remoteness of Relationship Managers from their customers and a frequent reluctance of SMEs to speak to their banks except when needed contribute to a lack of effective communication and knowledge-sharing.

So what are the non-bank alternatives (I have assumed that personal and family sources of finance have already been exhausted)?  They include:

·         Government incentives (if any) to guarantee bank loans to SMEs.
·         Smaller institutions or mutual funds with SME portfolios.
·         Overseas banks if you’re an exporter.  Your buyer’s bank may be willing to lend the buyer the money to buy your goods if yours won’t lend you the money to sell them.
·         Government support (depending if the business’ product/service is deemed important enough).
·         “Angel investors” who specialise in SMEs. 
·         “Crowdfunding”, which originated in the USA, is a relatively new source of finance which helped to raise $2.7Billion in 2012 (an 81% increase on 2011) and is expected to raise $5.1billion in 2013.
 
With banks still under the cosh for previous bad lending decisions, this traditional source of finance can’t be relied on.  Even if things calm down, I personally feel that new prudential regulations and oversight will make borrowing from banks more, rather than less difficult, with its concomitant effect on business growth.

 

I have spent more than half my life delivering change in different world markets from the most developed to “emerging” economies. With more than 20 years in the world financial services industry running different service, operations and lending businesses, I started my own Performance Management Consultancy to offer solutions for improving performance, productivity and risk management.  I work with individuals, small businesses, charities, quoted companies and academic institutions across the world. An international speaker, trainer, author and fund-raiser, I can be contacted by email . My website provides a full picture of my portfolio of solutions.  For strategic questions that you should be asking yourself, follow me at @wkm610.

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posted by William Martin @ 16:09

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