SME Financing – Rethinking the Approach

Despite numerous assistance and incentives provided by the government through credit guarantees and grants, among others, many SMEs continue to find it difficult to secure financing from the banks at large.

While some SMEs reckoned that banks are getting more stringent in assessing their credit applications, the others felt lost when dealing with the banks not knowing what the bankers wanted from them. Some SMEs commented that banks remain less interested in their credit applications, hence their applications being rejected despite multiple rounds of discussion and submission of additional information required by the banks.

More critically, many SMEs that failed to secure the necessary financing do not know the reasons for the rejections. Without knowing the exact reasons, they find it hard to address any issues, thus improving the chances of approval.

This article aims to dwell on ways to address these questions that continue to plague many SMEs.

SME Financing

Based on the statistics by Bank Negara Malaysia, financing application by the SMEs have been hovering around RM200 billion over the past three years, translated to about RM17 billion per month. The approved limit, however, declined to RM70 billion in 2018 from RM75 billion in 2016, reflecting a declined approval rate from 38% in 2016 to 36% in 2018.

Based on studies, there are various obstacles faced by the SMEs in securing financing from banks. The key obstacles are due to lack of collateral, brief track records, inexperienced management, weak business plans, and insufficient documents.

SMEs need to find ways to overcome these hindrances in order to secure financing from banks.

Some SMEs, however, felt that there are more to these key obstacles that hindered banks from granting credit facilities to them. They see the needs to understand how the banks evaluate their credit applications.

Just like in any school examination, candidates would find it difficult to score well without knowing what the examiners expect from them. Here, the SMEs would not be able to thoroughly convince the bankers without knowing what exactly the bankers require and assess.

It is only by knowing the bank assessment process and other important requirements that the SMEs can be better prepared.

Understanding Bank Assessment

Broadly, bank assessment is divided into two major parts, namely assessments on business risk and financial risk.

These risk assessments can be complex, involving the application of different tools and industry-wide informtion. It is upon full understanding of the SME’s risks in both areas that the banks would then make the appropriate credit decisions. Let’s understand what make up these risks:

• Business Risk
  Business risk covers a wide range of factors relating to the SME businesses. The fundamental risk assessment involves the viability of business model and overall strategy undertaken by the SMEs. This information is critical as it indicates the sustainability of the business. The banks would also assess the strength and uniqueness of products and services offered by the business. What are the key features and benefits of these products and services that can attract the customers? Where is the market coverage? Critically, the banks would like to establish the experience of the key management team. Who are the key personnel and their expertise? Equally important is the business approach towards environmental issues which many SMEs do not seem to pay much attention. All these factors would impact the well-being of the business. The banks must be convinced and comfortable with the overall business.
• Financial Risk
  Banks would carry out detailed analysis on the financial information submitted by the SMEs, such as audited accounts, management accounts and bank statements. The financial risk assessment includes financial ratios analysis, SWOT analysis, sensitivity analysis, among others. Banks aims to gather the relevant information that would provide clear indication of the past business performances, as well as the future business potential from financial projection analysis. This analysis concerns the well-being of the business operations and the ability to deliver its business goals in the future, hence the ability to repay its borrowings to the banks.

Enhanced Approaches

When the SMEs reckon that their credit applications were rejected due to factors beyond the key obstacles highlighted earlier, they need to rethink their approach when dealing with the banks. They need to refine their story of their business performance and potential in the future.

Together with the submission of the necessary information and documents, the bankers will now have the complete materials to carry out a proper and thorough assessment. A well-presented application supported by a convincing story about the business would enhance the approving chance of the applications.

Following are the two key components that can smoothen and speed-up the credit application process, hence elevate the approving rate of credit application:

• Convincing Story
  This area is utmost important. The SMEs who know the business best need to apply relevant soft-skill in expressing the contents of their business in a clear and confidence way. They must be able to articulate clearly about the business operations and the way forward – in a certain and confidence manner. Body language when dealing with the bankers is equally important. SMEs must be driven and progressive when presenting accurate information to the bankers. When the bankers are convinced with the story, half the battle is done.
• Complete InformationThere is no compromise on the availability, completeness and accuracy of both statutory documents and financial information. SMEs must ensure all the required information is properly compiled and submitted to the bankers for revaluation. And shortcoming in this area would cause delay in the entire assessment process.

Moving Forward

In essence, SMEs that are seeking bank financing must not only prepare the necessary information required by the bankers, but also the way they approach and deal with the bankers. The ability to convince the bankers on their expertise and experience in leading their business to the next level is crucial.

In short, SME owners must apply competent soft-skill in managing the conversation with the bankers. The bankers must be convinced before they can view and assess the loan application with a positive mindset. When this is achieved, the chances of getting their credit application approved will be greatly enhanced.

A more detailed explanation together with the practical approach in addressing this subject can be found in the book written by the author and published by MPH Publishing entitled “SME Challenges and Solutions”.