EASING FINANCES FOR SMES:
Financing enterprises is not an easy thing more so for SMEs, who at times are highly informal. For any funders to be able to release resources to an enterprise they need to acquaint themselves with a lot of information pertaining to that enterprise.
IN-depth knowledge about the players in the business would assist in devising funding strategies and intervention measures that adequately respond to the needs of the enterprise. This requires that the potential financiers understand the following issues as an imperative:
◆ The nature and dynamics of the sector in terms of product and service offering;
◆ Funding requirements;
◆ Risk profiles
◆ Level of profitability;
◆ Accounting practices;
◆ Varied compliance levels with
local authorities’ by-laws ◆ The size of various enterprises. The funding challenges faced by the diverse players in the SME sector also vary because the SMEs are rarely homogeneous.
Thus any strategy for intervention to support these businesses need to take note of the diversity of the sector in order to avoid blanket statements that paint all businesses with one brush.
The SMEs of which the majority are in the informal sector also suffer from negative perceptions.
These businesses are considered as high risk and some of their activities are perceived as illegal in nature.
Currently, the ability of banks to lend to the private and public sector is a function of the different sources of liquidity.
The main sources of the scarce liquidity are export earnings, diaspora inflows, offshore credit lines, foreign direct investment inflows and capital transfers including grants.
These sources of financing continue to dwindle while at the same time the expectations from all sectors continue to grow.
The SME sector is one of those sectors that require financing since the economy has undergone tremendous transformation which now sees this sector playing a pivotal role in the economy.
With scarce resources borrowers should look for alternative means of financing outside traditional loan finance.
This entails thinking outside the box on how they can finance their various operations.
The SMEs who have become the engine for economic development are also facing challenges pertaining to how they can finance their operations hence the need to become innovative in their sourcing of finances.
Innovative financing should ensure the availability of stable financing.
These financing resources must be predictable over the time frame required by the sector players so as to make planning possible.
Successful and sustainable innovative financing mechanisms require that the SME sector should be well organised.
Resources have a tendency to follow where there is order and formal structures.
Tobacco farming is a good example. With properly organised structures, the players in the sector should at times be in a position to borrow as a group rather than as individuals by using accumulated resources in savings as collateral.
Under this arrangement, the resources of the group can act as a cash guarantee fund of sorts for any borrowings made by the members.
Various players in the SME sector can formalise their structures and come up with a register of their dedicated membership so as to build resources through monthly or quarterly contributions.
These contributions would then be used as seed funds which can be placed in a bank and form the bedrock of any borrowing that these organisations can undertake on behalf of their members.
Innovative financing would have little chance of success if potential contributors are not convinced that their contribution would add value to their business ventures and if there is lack of transparency on how their contributions are being managed.
SMEs who require capital equipment can also consider lease financing options.
A lease is a contractual arrangement between two parties whereby a party that owns an asset lets another party use or hire the asset for a predetermined time period in exchange for periodic payments.
Leasing focuses on the lessee’s ability to generate cash cows from business operations to service the lease payments, rather than on the balance sheet or on past credit history.
This explains why leasing is particularly advantageous for the majority of SMEs that do not have a lengthy credit history or a significant asset base for collateral.
The equipment obtained through leasing could be shared among group members in a transparent manner so that all members have equal access.
Another option after pooling resources together would be to use debt financing.
This financing mechanism entails borrowing money and not giving up ownership.
Debt financing often comes with strict conditions or covenants in addition to having to pay interest and principal at specified dates.
Adding too much debt will increase the organisations future cost of borrowing money and it adds risk for the company.
Properly organised SMEs should utilise the advantage of strength of numbers, ability to be organised and develop bankable proposals which should be used to attract debt finance.
Under this arrangement, the SMEs sector should be able to approach institutional investors such as insurance and pension funds as venture partners.
This organised framework assists the potential investors or funders to view the organisation as a single entity rather than as various fragmented institutions.
Structured finance is a complex financial instrument offered to borrowers with unique and sophisticated needs.
Generally, a simple loan will not suffice for the borrower so these more complex and risky financing instruments are implemented.
Structured financial products are not offered by all lenders and, in almost all cases, are not transferable between other types of debt in the same way as a straightforward loan.
They are usually only offered to large borrowers needing a vast injection of capital or another source of income.
The above innovative methods of financing should be able to draw funds from a much wider range of sources than conventional financing.
Dr Sanderson Abel is an economist. He writes in his capacity as Senior Economist for the Bankers Association of Zimbabwe. For your valuable feedback and comments related to this article, he can be contacted on abel@baz. org.zw or on numbers 04-744686 and 0772463008