POST TIME: 10 November, 2019 00:00 00 AM
Finances for small and medium-sized entities
SME entrepreneurs are continuously upgrading themselves to become competitive and remain the best. As the experiences of SME finance in Bangladesh suggest, there is a critical need for putting in place a credit delivery system that evaluates the credit worthiness of borrowers

Finances for small and medium-sized entities

Modern time is the golden time of business. In a developing country like Bangladesh, Small and Medium Enterprises (SMEs) can play an important role in the economy, employing huge numbers of people, and helping to shape innovation and diversity. Governments regularly offer incentives, including favorable tax treatment and better access to loans, to help keep them in business. Since this sector is labor intensive with short gestation period, it is capable of increasing national income as well as rapid employment generation; achieving Millennium Development Goals (MDGs) especially eradication of extreme poverty and hunger, gender equality and women empowerment. SME sectors can treat as employment generating machine and focused on SME development for higher economic growth, narrowing the gap of income inequality and poverty alleviation. Many government/semi-government and autonomous bodies has also emphasis on the development of SMEs considering it as the driving force for industrialization.

Small and Medium Enterprises (SMEs) are businesses that maintain revenues, assets or a number of manpower/employees below a certain threshold. Each country has its own definition of what constitutes a Small and Medium Enterprise (SME). The sizing or categorization of a company as SME, depending on the country, can be based on a number of characteristics. The traits include annual turnover of business entity, number of manpower/labor-forces, the amount of assets owned by the company, or any combination of the features.

SME entrepreneurs are continuously upgrading themselves with a view to be competitive and to remain the best. As the experiences of SME finance in Bangladesh suggest, there is critical need for putting in place a credit delivery system that evaluates the credit worthiness of borrowers, on a basis other than fixed asset ownership. The evaluation may require examining transaction records of the borrowers, assessing the value of movable assets, experience of directors, business plan etc. There will also be the need for enhanced post disbursement monitoring. An effective SME finance policy will have to cover such enhanced cost of credit administration. In addition to credit guarantee or refinancing facility there will have to be ample rediscount facility for the primary lender to accommodate these costs. Such credit line also needs to be made available to non-bank institutions such as the NGOs. The financing scheme should also include special provisions for women entrepreneurs. Indeed, the implementation of appropriate policies and strategies is a prerequisite to control sustainable competitiveness of SMEs around the country.

SMEs are restricted in their sources of new equity finance. They are private companies, with a limited number of shareholders. Unless the shareholders are wealthy, there is a limit to the amount of extra capital they may be able to invest in the company. SMEs therefore rely heavily on retained profits for new equity finance, but there is a limit to the amount of equity that can be obtained from this source, especially when profits are low.

Remember, it is not easy for SMEs to attract venture capital. They must be able to exhibit strong opportunities for profit growth. As such, SMEs are restricted in the amount of new equity they can obtain; they may rely on borrowing to supplement their finances. Government policy can have a major influence on the level of funds available for borrowing i.e. Tax Policy (including concessions given to business to invest, for example, tax allowable depreciation and taxes on distributions, higher taxes on dividends mean less income for investors) and Interest Rate Policy (can affect lending to SMEs, high interest rates work in different ways, borrowing for SMEs becomes more expensive, but the supply of funds is also great as higher rates give greater incentives to investors to save). SMEs, however, also face competition for funds. Inventors have opportunities to invest in all sizes of organization, also overseas and in government debts.

The main handicap that SMEs face in accessing funds is the problem of uncertainty and risk for lenders. Whatever the details provided to potential investors, SMEs have neither the business history nor the longer track record that larger or conglomerate enterprises possess.

Also, SMEs will have to provide extensive information about their business to a bank when they seek loan finance. They will need to give a business plan, a list of the firm’s assets, details of the experience of directors and managers and show how they intend to provide security for sums advanced. Prospective lenders, usually banks, will then make a decision based on the information provided. The terms of the loan (interest rate, term, security, and repayment details) will depend on the risk involved, and the lender will also want to monitor their investment. A common problem is often that the banks will be unwilling to increase loan funding without an increase in security given in the form of assets (which the owner may be unwilling or unable to provide), or an increase in equity funding (which may be difficult to obtain). And this problem can lead to overtrading problem for business entity (a business which is trying to do too much too quickly with too little long-term capital).  A further problem for SMEs is the maturity gap. It is particularly difficult for SMEs to obtain medium term loans due to mismatching of the maturity of assets and liabilities. Longer term loans are easier to obtain than medium term loans as longer loans can be secured with mortgage against property.

  The changing world economic condition of least developed countries (LDCs) and developing countries have been moving to the rapid industrialization. In this age of industrialization era small and medium enterprises are contributing much more with their own flow but in this competitive market and economy it is really tough for those small and medium industries to survive as they have faced greater difficulty in obtaining financing, higher fixed costs of taxation, and regulatory compliances. SMEs can make portfolios of a country’s financial sectors extremely vital for development of economic growth, innovation, and diversity.

Md. Harun-Or-Rashid, Works at SIBL, (Appraisal Unit), BBA, MBA (Banking), DU, Certified Finance Specialist