Alternative financing – way to go for SMEs?

> Bank Negara Malaysia report estimates funding gap of RM21.8 billion for small and medium enterprises

PETALING JAYA: Bank Negara Malaysia (BNM) said in its report Financial Stability and Payment Systems that there is a RM21.8 billion gap in financing for small and medium enterprises (SMEs) which could eventually be filled by alternative financing, such as crowdfunding, peerto-peer lending, factoring and leasing.

The report highlighted that in 2015, key outstanding alternative financing amounted to RM 3.3 billion in comparison to the rejection by banks of SME financing applications totalling RM25.1 billion. This leaves a gap of about RM21.8 billion, which the central bank opined could potentially be filled by alternative financing.

RHB Capital Bhd group economist Lim Chee Sing said looking to alternative methods such as venture capital, crowdfunding and other forms of finances is the way to go for SMEs, although such options may cost more in terms of returns to the funder given the higher risk associated with them.

“Banks in Malaysia in general are very keen to grow their lending to the SMEs, but they also have to be mindful in ensuring the repayment ability of the SMEs that they extend credit to. Otherwise, credit quality issues can erode banking profitability quite easily,” he said.

“It is therefore not surprising that new SME start-ups that do not have track records and credentials to gain confidence on their repayment ability from the bankers find it challenging to secure credit from the banking industry. Alternative financing is therefore a more suitable form of financing for these new SME start-ups given the different risk-reward profile of the financiers,” Lim said, adding that collaterals have become the last resort for banks to fall back on.

Dr Yeah Kim Leng, professor of economics at Sunway University Business School, is also of the opinion that there is room to be filled by alternative financing to bridge this gap, and those who are in the e-commerce and technology-based businesses should leverage on the internet to gain access to wider financing options.

He noted that the lack of record keeping, inadequate collaterals and uncertainties surrounding the business have become a constraint for SMEs to gain access to conventional sources of financing.

Yeah said it is essential for risk appetite to be created on the lender’s part to finance risky ventures, and this could only be done if the business is able to provide the lender with adequate information on the risks it carries as well as its credit-bearing ability.

BNM, in its report, emphasised the development of the factoring and leasing market as an alternative financing option for SMEs, considering the potential financing it could accord to such enterprises.

Factoring is a financing option provided by factors in exchange of accounts receivables of the business, whereas leasing is a type of financing where the risks and rewards of the assets ownership are transferred by the lessor to the lessee for lease rentals.

The central bank said the current volume of factoring and leasing in Malaysia is at 0.64% and 0.69% of gross domestic product (GDP), while global average factoring and leasing volumes in more developed countries are at 4.55% and 1.55% of their GDP, outlining opportunities for an additional RM48 billion in financing that could be raised for Malaysian SMEs.

Yeah and Lim, however, view these two financing options as more suitable for conventional businesses rather than budding SMEs and start-ups.

“These funding types are suitable for certain types of businesses particularly those that involve collaterals and assets and those that can actually use the facility to increase their business volume,” Lim said.

He added that the two types of fundings have been around for ages but are just not commonly employed in the SME space. “Sometimes it is also because of higher cost situation; if you can get cheaper cost financing then you tend to avoid them (factoring and leasing).”

Echoing the sentiments, Yeah said leasing and factoring may not be the way to go for SMEs as the cost incurred through the rates charged may be higher than what such businesses may prefer.

Yeah said the lower volume of leasing and factoring activities in Malaysia compared with that in developing nations could also be due to the lack of promotion of such services and there is a need for greater promotion of these types of financing for businesses to understand their cons and benefits, as well as to understand whether it is suitable for them to engage in such services.

“It is also a question of supply and demand and whether the suppliers are there and doing enough to promote their activities and perhaps some deeper analyses and studies on this service are also required,” he said.

According to an SME Corp Malaysia survey, small and medium enterprises increased their usage of alternative financing options such as cooperatives, pawnbrokers and leasing substantially in the third quarter of 2016, compared with the first quarter of the same year.

SEE