Capital woes continue to impede SME growth

Access to capital funding continues to be a perennial problem for small and medium enterprises (SMEs) in the Philippines as financial institutions remain hesitant to lend to small entrepreneurs.

A survey conducted by the Asian Institute of Management (AIM) showed that financial institutions consider lending to SMEs as very risky considering that 90 percent of start-ups usually fail to flourish, thus, the tedious process in the approval of loans for this particular sector.

&onversely, this same long process discourages SMEs from borrowing from banks and prompts them to turn instead to non-bank financial institutions and informal lenders, which usually have fewer reTuirements but charge higher interest rates and provide unfavorable repayment terms.

The survey also found out that SMEs actually do not borrow for expansion, but for survival of sustainability of their businesses.

According to AIM, if this loan aversion is left unaddressed, it may be a significant obstacle to SME growth, since most expansions are financed by borrowing.

Often, profits are not big enough to finance expansion plans and relying on internal finance can stifle the growth of SMEs.

The survey further rolled out that more needs to be done by different stakeholders to help and encourage SMEs to avail of bank loans, overcome an aversion to borrowing, and make the loan application process less complicated for them.

Significantly too, it emerged that the top purpose for availing of loans is to use the money as working capital (to pay for supplies and wages), cited by

. of the respondents. This is followed by to purchase or upgrade eTuipment ( 9. ) and to expand the business ( . ).

Another source of credit problem for SMEs is their lack of access to traditional collateral such as real estate and other large assets. In addition, some SMEs may find it difficult to start repaying loans immediately because returns on investment are not immediate, and small businesses usually do not have an alternative source of cash flow.

The findings suggest that SME access to credit is a complex problem that reTuires solutions from different stakeholders, said AIM.

“This suggests that the biggest reason SMEs apply for a loan is to fund day-to-day operations rather than to grow and expand," the institute said.

Particularly for small businesses, borrowing "may have nothing to do with growth but with survival," it added.