Small And Medium-sized Enterprises Financing Research Articles

Role of the Credit Risk Database in Developing SMEs in Japan: Lessons for the Rest of Asia

Small and medium-sized enterprises (SMEs) play a significant role in Asian economies as they contribute to high shares of employment and output. However, SMEs generally have limited access to finance compared to large enterprises. Given the bank-dominated financial systems in Asia, banks are the main source of financing for SMEs. For financial institutions, it is crucial to distinguish sound SMEs from non-healthy ones in order to avoid the accumulation of non-performing loans. Information asymmetry in this sector can be reduced by using accumulated data on SMEs and by employing credit analysis techniques, allowing lending institutions to recognize healthy SMEs. It is crucial for governments to collect SME data and prepare rich databases, such as the Credit Risk Database (CRD) of Japan. This will also help governments to formulate economic policies. In this paper we define and describe in detail the role and characteristics of Japan’s CRD in SME development and explain how it can be an example for other Asian economies to establish similar soft infrastructure that can make important contributions to SME development and boost economic growth.

Finance-seeking behaviour and outcomes for small- and medium-sized enterprises

Purpose – Model finance-seeking behaviour and outcomes by Australian small- and medium-sized enterprises (SMEs) using firm-level panel data. The paper aims to discuss this issue. Design/methodology/approach – Using firm-level three-year panel data for more than 2,000 SMEs from the Business Longitudinal Database compiled by the Australian Bureau of Statistics, the authors estimate separate models for the seeking of finance (debt and/or equity) and the outcomes of finance seeking (successful or unsuccessful). Key explanatory variables include declared business focus (on financial, cost, operational, quality, innovation, and human resource measures), presence of business plans and other documentation related to successful finance seeking, innovation, indicators for family and foreign-owned businesses, and profitability. Control variables include sales, the number of employees, length of operations, export and import activity, government financial assistance, and industry classification. Findings – Business objectives together with a large number of firm-level characteristics, including firm age, size, industry and sales, profits, growth and exports, significantly affect both finance-seeking behaviour and outcomes. The authors find evidence that the pecking-order and agency cost theories of capital structure at least partly explain the financial behaviour of Australian SMEs. Research limitations/implications – Several of the responses in the underlying survey data are qualitative so the authors are unable to assess how the strength of these relationships varies by the levels of sales and profitability. Practical implications – The findings show that business objectives significantly affect SME finance-seeking decisions and outcomes. SMEs that focus on profitability or growth have a strong willingness to seek additional finance; in comparison, SMEs that focus on the quality of their products or services are less likely to apply for additional finance. As only half of the SMEs in the sample considered profitability or growth to be a major business focus, core business objectives greatly affect SME financing decisions. Further, pecking-order theory not trade-off theory better explains the financial behaviour of SMEs, yielding evidence that SMEs continue to face financial constraints when pursuing growth. Some evidence also of agency cost theory in the positive effects of family ownership on debt seeking. Originality/value – One of very few studies to examine finance seeking by SMEs, especially in Australia. Further, only study known to include declared business strategy, presence of business plans and other finance-related documentation and innovation in addition to the usual focus on growth and profitability to explain financing behaviour. Very large panel of longitudinal data used to explain financial decision making over time.

Analysis of Credit Ratings for Small and Medium-Sized Enterprises: Evidence from Asia

In Asia, small and medium-sized enterprises (SMEs) account for the major share of employment and dominate domestic economies, yet providing these companies with access to finance is a challenge across the region. Asian economies are often characterized as having bank-dominated financial systems and underdeveloped capital markets, in particular with regard to venture capital. As a result, banks are the main source of financing for SMEs. It is crucial for banks to be able to distinguish healthy from risky companies. If they can do this, lending and financing SMEs through banks will be easier. In this paper, we explain the importance of SMEs in Asia. Then, we provide a scheme for assigning credit ratings to SMEs by employing two statistical analysis techniques—principal component analysis and cluster analysis—applying 11 financial ratios of 1,363 SMEs in Asia. If used by the financial institutions, this comprehensive and efficient method could enable banks and other lending agencies around the world, and especially in Asia, to group SME customers based on financial health and adjust interest rates on loans and set lending ceilings for each group.

Entrepreneurial Qualities and Small Business Growth

Purpose: In the competitive business world of today, in which flexibility, speed and adaptability are essential for survival and progress, small and medium sized enterprises (SMEs) including small business play all extremely important role in any country's economic development. Recognized the important of small to economy and individual, many previous studies have been done on the issue regarding this topic. A number of authors are concerned with explaining the factors contributed to successful of firms. However, a vast of previous literature on small entrepreneurship and business management overlooked the various factors that may influence business growth. This paper aims to advance knowledge about the relationship between entrepreneurial qualities and small business -growth by tested using Structural Equation modeling with data collected from SME finance participants. Findings: Previous works on small business area, the paper provide empirical evidence, where entrepreneurial qualities represent by various dimensions such as generic, technical and managerial skills in the direct relationship with small business growth. The findings indicate that only generic and managerial skills have positive relationship on small business growth, while technical skills have no relationship. Limitations: The small sample size which was dominated by small business was the major limitation of the study. Implications: This result can be used in the study on the impact of entrepreneurial qualities toward small business growth in the future.

Filling the Gap: How Technology Enables Access to Finance for Small- and Medium-Sized Enterprises

Traditional financial services are rapidly being reformed by technology. Small- and medium-sized enterprises (SMEs) account for more than one-half of the world’s GDP and employ two-thirds of the global workforce, however a key barrier to growth faced by SMEs around the globe is access to financing. This is not a new issue, as the onerous information, administration, and collateral requirements associated with traditional loans have inhibited SMEs from seeking or securing financing. The 2008 financial crisis only exacerbated the problem, as many local retail banks (often the primary providers of SME financing) closed their doors and the appetite for taking on high-risk SME loans was quelled. Online business lending may be stepping in to fill this gap by resolving many of the barriers associated with traditional SME financing. This paper analyzes data from PayPal Inc., a company best known for its global online payment system, and from Kiva, a crowdsourcing platform. PayPal Working Capital launched in late 2013; it is a product that enables SMEs to apply for and obtain short-term credit. Our objective is to understand how technology is impacting SMEs’ ability to access financing. Our findings suggest the following: (i) online business loans have stepped in to fill the SME funding gap left in the wake of the 2008 financial crisis; (ii) young and minority-owned businesses with low and moderate income benefit particularly from online business loans; and (iii) online business loans can boost the growth of SMEs in under-served counties. Based on increased sales of businesses that have received PPWC loans, we estimate that programs like this have the potential to boost economic activity considerably.

Capital Markets Union and Small and Medium-Sized Enterprises (SMEs): A Preliminary Assessment

The Capital Markets Union is the European Commission’s latest policy initiative in the capital markets field. It is a project in the making. Much of it remains to be spelled out and fleshed out. However, the first elements of a future CMU are slowly beginning to emerge. The aim of this paper is to discuss these elements and to offer a first assessment. In particular, this paper aims to discuss the relationship between the CMU and one of its key objectives which has proved elusive in the past: that is, of facilitating access to finance for SMEs. In this process, the paper offers a number of suggestions on how to make progress on this crucial issue. Among other things, it advocates a form of supply side driven matchmaking as a means to improve information issues affecting SMEs in the SME funding market.

Why Do SMEs Not Borrow More from Banks? Evidence from the People's Republic of China and Southeast Asia

This study examines the relationship between firm characteristics and borrowing from commercial banks by small and medium-sized enterprises (SMEs) in the People's Republic of China (PRC) and five Southeast Asian economies (Indonesia, Malaysia, the Philippines, Thailand, and Viet Nam). Analysis of microdata from enterprise surveys highlights key aspects of SME finance since the global financial crisis, including sources of credit, lender types, and collateral types. First, SMEs typically resort to internal sources rather than external finance (including borrowing from banks) and trade credit. Second, when it comes to external finance, SMEs typically use informal non-bank credit sources more than banks. Third, there is a positive and significant association between bank borrowing and certain characteristics of SMEs, notably financial audits, firm age, and export participation. Fourth, personal assets of SME owners tend to matter more as collateral for SME borrowing from banks than other collateral types. Improving credit guarantee systems, enhancing monitoring and credit scoring by banks, and widening the scope of collateral are possible ways to facilitate increased bank borrowing by SMEs.

Unlocking SME finance through market-based debt

Small and medium-sized enterprises (SMEs) are key contributors to economic growth and job creation. The current economic and financial crisis has reduced bank lending and has affected SMEs in particular. Capital markets will have to play a bigger role in financing SMEs in order to make them more resilient to financial shocks. This article reviews the spectrum of alternative market-based debt instruments for SME financing. It focuses on securitisation and covered bonds and also addresses issues regarding small/mid-cap bonds and private placements. It reviews the current state of the market for these instruments and identifies associated risks; analyses the barriers for issuers and investors alike; and provides best practices and high level recommendations to help alleviate barriers without hampering the overall stability of the system. JEL classification: G1, G2, G23, G28 Keywords: SME finance, SME securitisation, non-bank finance, (high-quality) securitisation, asset-backed securities (ABS), SME CLO (collateralised loan obligation), (covered) bonds, private placements, financial regulation, European DataWarehouse, Prime Collateralised Securities (PCS) initiative

The financing of innovative SMEs: A multicriteria credit rating model

Small and Medium-sized Enterprises (SMEs) face many obstacles when they try to access the credit market. These obstacles increase if the SMEs are innovative. In this case, financial data are insufficient or even unreliable. Thus, building a judgmental rating model, mainly based on qualitative criteria (soft information), is very important to finance SMEs’ activities. Till now, there has not been a multicriteria credit risk model based on soft information for innovative SMEs. In this paper, we try to fill this gap by presenting a multicriteria credit risk model named ELECTRE-TRI. A SMAA-TRI analysis is also implemented to obtain robust SMEs’ assignments to the risk classes. SMAA-TRI incorporates ELECTRE-TRI by considering different sets of preference parameters and uncertainty in the data via Monte Carlo simulations. Finally, we carry out a real case study with the aim of illustrating the multicriteria credit risk model.

Hometown Investment Trust Funds: An Analysis of Credit Risk

In Asia, small and medium-sized enterprises (SMEs) account for a major share of employment and dominate the economy. Asian economies are often characterized as having bank-dominated financial systems and underdeveloped capital markets, in particular venture capital markets. Hence, looking for new methods of financing for SMEs is crucial. Hometown investment trust funds (HIT) are a new form of financial intermediation that has now been adopted as a national strategy in Japan. In this paper, we explain the importance of SMEs in Asia and describe about HITs. We then provide a scheme for the credit rating of SMEs by employing two statistical analysis techniques, principal components analysis and cluster analysis, and applying various financial variables to 1,363 SMEs in Asia. Adoption of this comprehensive and efficient method would enable banks to group SME customers based on financial health, adjust interest rates on loans, and set lending ceilings for each group. Moreover, this method is applicable to HITs around the world.

Bank officers’ perceptions and uses of qualified audit reports

Purpose – The purpose of this study is to provide insights into the perceptions and uses of qualified audit reports in financial statements of small- and medium-sized enterprises (SMEs). As there is a long-standing debate on the usefulness of auditor’s going-concern reports, this study aims to provide insights into the factors that affect how banks perceive and use going-concern reports. Design/methodology/approach – Semi-structured interviews with bank officers were conducted. Findings – The study findings demonstrated that bank officers considered that the going-concern report provided information, although they did not regard the information as being particularly useful. The main factors affecting the usefulness of information are use of other information sources and bank officers’ perceptions of auditing. Other factors are also presented and discussed in the current research paper. Practical implications – Regulators have taken the action to improve the auditor’s reporting model, and the findings provided by this study are important because they provide a deeper understanding of the perceptions and uses of audit reports from smaller companies. The study also contributes knowledge about the role of audit reports in the context of SMEs finance. Originality/value – This is one of the first studies to use a qualitative approach to examine factors that affect the use of going-concern reports.

Non-bank debt financing for SMEs

Reducing bank dependence in financing small-and medium-sized enterprises (SMEs) that are key contributors to economic growth and job creation should help making them more resilient to financial shocks. Various non-bank debt financing alternatives are available and were the focus of a Roundtable discussion that this article draws on. Revitalising securitisation, tarnished during the crisis, is important, by making it safer, simpler and more transparent, and perhaps also by offering some (initial) government and regulatory support. Similarly, covered bonds can be attractive instruments for SME finance. For mid-sized companies, bond issuance and private placements may also provide useful alternatives. All these instruments can and should be tailored to fit the investors’ needs. There is no silver bullet for SME finance which is exceptionally complex due to the diversity of SMEs themselves. Data transparency, standardisation, regulatory support and raising awareness about available financing options should be among the issues to be addressed. JEL classification: G1, G2, G23, G28 Keywords: SME finance, non-bank finance, (high-quality) securitisation, asset-backed securities (ABS), SME CLO (collateralised loan obligation), (covered) bonds, private placements, European DataWarehouse, Prime Collateralised Securities (PCS) initiative.

A New Regime of SME Finance in Emerging Asia: Enhancing Access to Growth Capital and Policy Implications

While finance is critical for small and medium-sized enterprises (SMEs) to survive and grow, most SMEs suffer from poor access to finance. Given the pronounced global financial uncertainty, stable access to appropriate funding sources has become even more difficult for SMEs to attain. Lessons from the global financial crisis have motivated many countries to consider SME access to finance beyond conventional bank credit and to diversify their domestic financial systems. This paper uses empirical analysis to point out the limitations of traditional bank lending to SMEs and suggests possible policy approaches facilitating them to access growth capital.

The role of personal loans in the financing of SMEs

PurposeThe purpose of this paper is to study the determinants of the use of personal loans in small and medium‐sized enterprises (SMEs).Design/methodology/approachPersonal loans are addressed as a function of the borrower and collateral. To empirically test the hypothesis of this study, a probit model was applied to a group of companies in Bahia Blanca, Argentina, with a previous analysis of the possible effects of sample selection.FindingsOlder companies, firms with lower expected growth rates, younger owners, those who seek to create value or growth, and owners who perceive low emotional costs associated with bankruptcy, are less likely to use personal loans to finance their operations.Research limitations/implicationsThis study is limited by the availability of data on SMEs in Argentina.Social implicationsThe results highlight the importance of financial aid programmes that focus on SME scarce availability of collateral.Originality/valueThis study makes three principal contributions: first, it investigates the phenomenon of personal loan utilisation in SMEs; second, it analyses financing decisions from both the supply and demand perspectives; and third, it presents a database that includes variables that have not been previously studied in Argentina or other emerging economies.

The New Paradigm in Small and Medium-sized Enterprise Finance: Evidence from Turkish Banks

Over many decades, numerous cross-country studies and policy papers have argued that banks are not interested in lending to small and medium-sized enterprises (SMEs). In recent years, the visible transformation in the way that many banks are conducting business with SMEs suggests that a paradigm shift is taking place in SME finance. This country study contributes to the newly emerging literature on the subject by providing evidence on how this transformation is taking place in the Turkish banking sector. The findings of this research reveal that in Turkey, the large banks are not only allocating a bigger share of their loan portfolio to SMEs but are also reaching down to the smaller businesses more than the small banks are doing. These findings underline the importance of the large commercial banks for increasing SMEs’ access to finance in the Turkish economy.

Evaluation of SME and bank financing: development of a rating model for banks from a sample of 179 SMEs in Cameroon

The aim of this paper is to make a mathematical model, which can be used in the risk quantification of small and medium-sized enterprises (SMEs) in Cameroon. We first use logistic regression to build the model for computing the probability of default, second, we use clustering to build classes of risk. Although variables are qualitative, therefore difficult to evaluate, we obtained a model with a rate of 90% for good classification, with variables which explained 83% of failure and 96% of power of prediction. This model could be a very useful tool which would improve the capacity of banks in Cameroon.

Long-Term Financing in Europe

Although policymakers in Europe are increasingly focused on fueling economic growth and job creation with infrastructure projects that require long-term investment, there are potential obstacles to channeling investment capital appropriately. To help shape the policy debate, CFA Institute recently brought together key thought leaders and policymakers at the forefront of the long-term financing debate to explore the implications for investors of less dependence on bank financing and more interest in investment capital. Speakers included John Kay, chair of “The Kay Review of UK Equity Markets and LongTerm Decision-Making” (prepared at the request of the UK government) and currently chair of the CFA Institute Future of Finance Advisory Council, and Fons Lute, managing director of the fiduciary mandates investment team at BlackRock. Discussion centered on three major topics: regulation, the transition from relationship banking to transaction banking, and better due diligence. In Europe, regulation has focused more on market conduct than on market structure, but most of the roundtable participants agreed that structure is a longer-term issue. Further complicating matters in Europe is the diversity of needs within European countries; some countries have a large need in the mortgage market while others are targeting infrastructure or public works. The transition from relationship banking to transaction banking has increased the intermediary chain, eroding knowledge of both investors and borrowers. In addition, longer-term financing needs a diversity of financing to match cash flow needs. Investors may not currently have the same level of expertise where long-dated maturities are concerned. Longer-term financing needs better due diligence and the possibility of nonbank loans. In the aftermath of the financial crisis, financing has lacked diversification, with the drying up of the securitization market and the difficulty of finding seed capital in private equity. CFA Institute is closely monitoring the debate around long-term financing. In a June 2013 comment letter to the European Commission, CFA Institute reflected the opinions developed in an EU members’ poll. The comment letter highlighted five priorities: (1) regulatory framework, (2) short-termism, (3) investment vehicles, (4) securitization, and (5) fair value accounting. First, a regulatory structure at the EU and national level that incentivizes long-term investing is essential. Second, in regard to short-termism, asset owners should hold asset managers accountable for performance over longer-term evaluation horizons rather than the current tendency to focus on quarterly returns. Third, concerning investment vehicles, innovation in developing new pooled fund vehicles targeted toward infrastructure and other long-term investments (“long-term investment funds”) is welcome and can afford investors important diversification opportunities. Any such new investment vehicles should offer enhanced disclosure to investors regarding risks and redemption restrictions. Fourth, a revival of the securitization market is welcome but must not be characterized by the complexity and opacity of deals in the past. CFA Institute proposes a special designation that would distinguish those long-term investments that satisfy a suitably high standard of disclosure quality. Finally, CFA Institute refutes the notion that fair value accounting policies contribute to short-termism and argues that fair value can in fact reduce the information asymmetry that exists between issuers and investors as to the value of corporate assets and liabilities. Because Europe is trying to stimulate its sluggish and diverse economy, especially through small and mediumsized enterprises (SMEs), long-term financing will be the focus of many talks within the European regulatory environment. Both the European Commission and the European Parliament will be taking stock in the coming months, preparing for elections in the European Parliament and for a new Commission. With investors playing a growing part in SME financing, it is essential that policymakers consider these issues from an investor perspective.

Firm-Level Determinants and Impacts of Finance-Seeking Behaviour and Outcomes for Small and Medium-Sized Enterprises (SMEs) in Australia

This paper uses firm-level data from the Business Longitudinal Database compiled by the Australian Bureau of Statistics to examine finance-seeking behaviour and outcomes by Australian small and medium-sized enterprises (SMEs). By modelling the determinants of SME financing behaviour and outcomes using discrete choice techniques and more than two thousand firm cases, we throw useful light on the firm-level factors involved in both debt and equity financing decisions, the availability or lack of availability of finance, and the impact of these outcomes on future firm behaviour. Our findings indicate that a large number of SME characteristics, including firm age, size, industry and sales and the declared strategies for operations, profits, growth and exports, significantly affect both finance-seeking behaviour and outcomes. Putting aside any supply-side circumstances, we conclude that Australian SMEs suffer from severe financial constraints and this significantly affects their strategizing and decision-making across a number of areas.

Real-time financing: Extending e-invoicing to real-time SME financing

Small and medium-sized enterprises (SMEs) are becoming increasingly dependent on alternative ways to finance their working capital, as their trading counterparts are extending payment terms, and increased capital requirements are forced upon banks, limiting access to traditional sources of funding. At the same time, financing SMEs is not trivial: (1) traditional supply-chain finance is not scalable to achieve mass adoption and (2) factoring involves risk assessment on the basis of historical data, leading to a certain minimum financing value. Innovative non-bank players are also addressing this market with new platforms with state of the art technology, but encounter the same limitations. With the advance of digital invoicing, payment and risk techniques, new methods for financing SMEs are becoming possible. The paradigm described here consists of creating a collaborative network in which payment status information on payable invoices is being exchanged in real-time and on request from the creditor SME or its lender. Real-time Financing (RTF) makes it easier for SMEs to receive financing on their accounts receivable, since lenders can automate their process of financing, irrespective of the service provider of its trading counterpart. As such, trading entities can reside with their own service providers and do not need to join a new provider to service a specific business relation. For lenders, RTF makes it possible to increase the frequency of financing transactions against a lower risk per engagement as risk information (ie invoice status information) is made available in real-time. The backbone of RTF is a collaborative scheme for standardising invoice payment status messages and puts its participants in a legal and trusted business relation with each other. Participants include actors throughout the financing value chain, including software vendors, e-invoicing providers and banks. The creation of such a scheme will be a challenge, however, since this requires cooperation between, in essence, competing parties, but considering today’s tight credit supply, the incentives for stakeholders might be strong enough to undertake such venture.

Research on Impcact of Interest Rate Marketization to SME Financing

Along with the reform of financial system pushing forward continuously in China, the government has been releasing regulation to interest rate, the process of interest rate marketization has been increasingly deepening. It is still a problem the small and medium-sized enterprises (SME) will face in the process of development that their financing is difficult. In the environment of interest rate marketization, the small and medium-sized enterprises should analyze that what impact will the interest rate marketization produce to themselves, improve their credit as well as business performance and strengthen financing management to realize a more rapid development.