Financing in SMEs

8/6/2019 Financing in SMEs

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Financing in SMEsFinancing in SMEsPresented By:

MISS. SANA RAZZAQ

MISS SAIMA RANA

MR. ALI

Report of Marketing ResearchReport of Marketing Researchon


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INTRODUCTION TO SMEs

SMEs are defined as companies with full-time

employee not exceeding 250 individuals in caseof manufacturing and 50 in case of trading (this

conforms to the definition used by SBP

Prudential Regulations for Small and Medium

Enterprises Financing).


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Financing and Capital Structure of SMEs is different fromLarge firms

* SMEs are comprised of 90% of Pakistan and gives Livelihoodto 80% people and is 40 % of GDP

44% rural establishments and 56% urban

* SMEs have pecking order of preferred Capital Resources


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CHARACTERSTICS of SMEsCHARACTERSTICS of SMEs

Limited Funding and Limited Access to Capital Market

Different stages of SMEs

Start Up Phase

Established Phase

Matured Period


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Finding Working Capital andFinancing for SMEsCompetition, financing and Quality of Labor are hurdles

Major Areas of SMEs in Pakistan

1. Manufacturing 42%

2. Commerce & Trade 32.7%

3. Construction 4%

Short Term Working Capital Financing


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Working Capital Cycle


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Ways of Short Term Financing1. Equity

2. Trade Creditors

3. Factoring

4. Line of Credit Loans

5. Short Term Loans


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These are some problem which awoke the need ofPencoder13 Funding Sources

1. Start-Up Financing

2. Equipment Leasing

3. Community Development Financial Institutions (CDFIs)

4. Micro-Loans

5. Asset-Based Loans

6. Bank-Term Loans

7. Private Loan Guarantees

8. Angel Investors

9. Business Incubators

10. Direct Public Offerings

11. Reverse Merger

12. Initial Public Offering

13. Institutional Venture Capital


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Evaluating Flexibility in SMEsEvaluating Flexibility in SMEs

Flexible Financing

Rigid Financing

SMEs use 50% flexible Financing


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Small Companies Credit Availability &

Relationship Lending

Types of Lending 1. Financial Statement lending

2. Asset Based Lending

3. Credit Scoring Lending

4. Relationship Lending


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Bank Borrower Relationship and the processof Bank Lending

Banks offering relationship lending must

delegate more lending authority to their loanofficers than banks focusing on transactions-based lending, since the soft relationshipinformation known by the loan officer cannot

easily be observed, verified, or transmitted toother decision makers within the bank.


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Lease financing in small companies

Lease is an agreement allowing one party to

use anothers property, plant, or equipmentfor a stated period of time in exchange forconsideration.

Lessor

Lessee


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Risks associated with Lease Financing

Credit Risk

Interest Rate Risk

Liquidty Risk

Transaction Risk Compliance Risk


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Categories of Leases

Capital Lease

Operating Lease

Sales Type Lease

Direct Financing Lease Leveraged Lease


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Documenting a Lease

When a bank is asked to purchase property for lease, it may issuea commitment to lease describing the property, the cost, and thelease terms. After these terms are reached in negotiationsbetween the bank and its customer, an order is usually writtenasking the bank to purchase the property. After purchasing theproperty, the bank arranges for any necessary delivery andinstallation. The bank should have a legally binding agreement tolease and a lease contract that incorporates all the points in the

commitment letter.


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Financing is Small Companies

Debt Financing

Equity Financing


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Elements of Strong Loan Proposals

1. Financing Overview

2. Legally Binding Loan Agreement

3. Collateral List

4. Loan Type Options

5. Payment Schedule

6. Outsourced Loan Servicing


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Typical Loan Approval Thought Process

1. Management Experience & Expertise

2. Detailed Business Plan3. Cash Injection

4. Collateral

5. Personal Character

6. Credit History

7. Personal Financial Statements


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Conclusion & Analysis

1. Choice between Flexible & Rigid Financing

2. Correlation Between Optimal & Actual Level of Flexible Financing

3. Limited Access to Long Term Loans= High Reliance onFlexible Financing

4. Expensive Line of credit5. Longer Term Loans are harder to obtain so flexible

are used mostly


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1. Correlation between knowledge base and

capital structure

2. Service sector firms are dominant in SMEs

3. Firms with low volatility of Cashrequirements use Flexible Financing


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Recommendations

ForCapital Structure in Pakistan

1. Companies should look to invest more equity by their own ratherdepending on Banks.

2. Benefits:

LowerWACC;

No obligation to fulfill debt covenants;

As the bank loans are senior debt, that reduces the credit rating of thecompany and subsequent increase in the spread on funding by thatcompany;

Company can survive even at lower profit rates as they dont have topay higher debt costs;

Lower profit rates will lead to lower product prices; and

Lower prices will leads to mitigate the current high rate of inflation.


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Recommendations

ForFinancing in SMEs

1. Banks should believe on Merit Financing instead of RelationshipFinancing

2. Banks should prefer SME Lending rather than lending major groups

3. Reasons:

As it is given to 1 company, the number of beneficiaries of that moneyis low and limited;

It will restrict proper money circulation;

In current times, when banks are facing liquidation problem, lending

huge amount of money to 1 company will enhance the problem; and Repayment risk will increase.


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1. Correlation between knowledge base and

capital structure

2. Service sector firms are dominant in SMEs

3. Firms with low volatility of Cashrequirements use Flexible Financing


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Recommendations

ForBanks to Increase SME Financing

make easy Lending Policies

Easy approach to Bank Lending Departments;

As most of the people related to SME sector are not highly educated, so bankshould use easy and understandable language in public massages;

Sales staff should be well trained;

Banks are required to give loans on easy and flexible repayment terms;

Prompt verification and internal working to enable quick and effectivecompletion of the lending process;

Timely disbursement of the loans; Require detailed market research to know the target market, target sector and

target areas; and

Lower markup rates and transaction costs.


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Recommendations

ForLeasing

* As most of the SMEs are in

Manufacturing concern so they must

use Leasing Facility


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Documents

Financing in SMEs