Download The Researches on the Financing Difficulties and Improved Method

The Researches on the Financing Difficulties and Improved Method
of SMEs in China
，
Meng Xiangsong 1 Liu Yan-chao 2
1 Economics and Management Department, North China Electric Power University, P.R.China, 071003
2 Colleges of Business, Hebei Normal University, P.R.China, 050091
[email protected]
Abstract As a part of the national economy, the small and medium-sized enterprises (SMEs) play an
important role in the continuation, stability, and coordinated development of one country's economy.
Since reforming and opening, SMEs have already become the important newborn combatants in China's
social and economic activity. On the other hand, the further development of small firms is landing
themselves in a more and more serious predicament, especially the financing difficulties have become a
major bottleneck to limit small firm growth in our country. This paper will research on the reasons of the
financing difficulties and analyze the measures to mitigate such financing obstacles.
Key words small and medium-sized enterprise financing difficulties financing innovation
1 Introduction
In recent years, the development of SMEs is attached more and more importance by international
community. China is an empire of SMEs. Since reforming and opening, many kinds of SMEs have been
established and gradually developed in a health external environment. According to statistics, at the end
of 2004, there were more than 3,600,000 SMEs, 279,000, 000 individual businesses registered in
Chinese Administration For Industry& Commerce, which accounted for 99.6% of the total number of
enterprises in China, 68% of exports, 48.2% of tax paid, 58.9% of social sales, 66% of invention patents
and 82% of new products. Further more, SMEs absorbed more than 75% of the urban employment
population, accounting for more than 80% of new created jobs each year. SMEs have already become
the important newborn combatants in China's social and economic activity. At the same time, SMEs are
playing an important role in keeping the stability of society, alleviating the pressure on employment and
promoting technological innovation and encouraging non-governmental investment etc. SMEs have
important and profound strategic significance in achieving the strategic target of well-off society.
SMEs played an irreplaceable role in promoting the national economy and social development and
keeping the stability of society by taking advantage of theirs small and medium size. Meanwhile SMEs
have a quantity of shortages which can't be overcome themselves. Such as the shortage of funds, the
difficulty in upgrading technology, the slowness of expanding market and the extensive management.
The shortage of funds is the outstanding problem. A good environment will directly impact the quality
of existence and the development speed of SMEs and then effect the development of national economy
and the competitiveness of our country.
2 the problems of SMEs financing
2.1The shortages of SMEs
We can't pay our attention simply on the external environment of SMEs. SMEs must firstly overcome
some shortages to mitigate the problem of financial constraints. First, some enterprises have not
established the mechanism of self-accumulation, so as to there are not enough and proper capital asserts
to mortgage. Especially there is the trend of "recognition of consumption but despising accumulation" in
the profit distribution among the small and medium stated-owned enterprises. It has become a common
principle for them to rely on loan for production and to pay the bonus by detaining the profit. Even
worse, some of them totally rely on the finance budget and further on loan for their survival. Second
most of SMEs are irregular and its management is random. The entrepreneur's reputation is low. Third,
SMEs have an attitude to hide the information because of the intense competition. SMEs borrowers tend
to be more informational opaque than their larger brethren and thus pose greater challenges for lenders.
To be successful, lenders must overcome the asymmetric information problems-adverse selection and
，
556
moral hazard-that are inherent in such borrowers.
2.2 Lack of perfect laws and policies system
Regarded as the weak, SMEs can't have healthy development without the protection and support of
the government's laws and policies. As a country based on law, polices about the protection to SMEs
need “according law to carry into execution” during the entire course from drafting to executing. As to
our present conditions, we have a lot of work to do. The US is one of the countries that resolve the
problems on SMEs by legislation and setting up special institution. To promote its development, the US
legislative institution put up “SME ACT”, “SME Investment Law Amendment Bill (1958)”, “Fair
implementation of the SME bill (1996)”, “Antitrust Law” etc. to create the chances to improve SMEs'
development. The US also set up the institutions such as the SME Board to support the services of
finance and management for SMEs. Japan also did well on this, “Basic SMEs”, “Modern SME
Promotion Law”, “SME Technology Act” etc. They set up SME Office and the financial institution,
emphasizing on finance, organization, and directed guidance to promote the development of SMEs. All
these stimulated the Japanese SMEs' development and accelerate the Japanese economy.
2.2 The faulty financial system
2.3.1 Loaning difficulties and lending difficulties
The loans of SMEs have the characters of large number of services, small amount, complex procedure
and high cost. So banks prefer to trade with large enterprises and guarantee their demands, which result
in the financing difficulties of SMEs. On the other hand, although SMEs can gain the loan, the interest
rate is higher. As the deepening of the revolution of financial institution, banking sectors pay more and
more attention on the credit risk. There is a current of intensives of credit authority. Primary banks'
approval authority is limited. Most of the demand for loan must be reported in accordance with the
procedures, which lead to more links, longer time, more complex procedures. So it's difficulty to meet
the demands of SMEs’ loan of short duration, high frequency and urgent needs. 2.3.2 Lack of a sound
credit guarantee mechanism
The situation of assets and credit of SMEs is unsatisfactory in the world. But there is a perfect
hypothecating system in some countries, so it’s not difficulty to get the loan for their SMEs. Establishing
the social credit system is a vulgate method to support SMEs, is a successful example to control market
economy and macroeconomic, is a effective measure for government to guide SMEs and is a important
instrument of reshaping the banks-enterprise relationship eliminating financial risks improving the
financial environment of SMEs.
According to the national survey of American in financing, almost 92% of the loans obtained of
SMEs from financial institutions are secured, which means that they have enough collateral. A.L.Ridlin
professor at Carleton University finds that by August 1999, 48% of the countries and regions have
already built up a credit guarantee system for SMEs. In China, the practice of SME credit guarantee
began in 1992. But it did not well enough. Especially the system lacks the non-state-owned private
banks. And guarantee mechanism can’t have an effect without an effective competition mechanism.
2.3.3 The absence of credit risk rating system for SMEs
A large number of standards of Enterprise Credit Rating Standards in our country are constituted for
big enterprises. There is not a series of measures to control credit basing at the characteristics of SMEs.
On this condition we can’t use some measures of SME securitization. In June 1998, ICBC assessed
350,000 SMEs to low credit rate by using the method of assessment for large enterprises. As a result, it’s
more difficulty for SMEs to obtain loans from banks, because the standards conclude the unfavorable
factors for SMEs.
2.4 The poor condition of management circumstances increases the financing burden
Enterprise products do not sell well, and manufactured goods, delivered commodities and account
receivable occupy too many capitals so as to decrease the utilization efficiency of capitals; enterprises
are in default to each other, a large amount of little enterprises are involved in the “debt chains” of
complicated owing or being owed; some large enterprises in cooperation with medium enterprises cease
transactions, refuse to receive or receive less ordered goods, postpone payment or take promissory note
payment for no reason. All these activities increase the financing burdens of enterprises. An economic
TV program called “Economy for half an hour” once reported: some large retailers on purpose default
，
557
，
and without reason detain suppliers the payment for goods, which cause a lot of supplier in difficulties
for ineffective capital turnover, and some even cannot recover after the setback, most of which are little
and medium enterprises. However, in Japan, the interests of little and medium enterprises are well
protected, and the Japanese government once enacted laws to adjust the relationship between large and
little enterprises. Some national departments levy upon enterprises for kinds of funds and charges, such
as family planning funds, retired work funds, contract workers pension funds and so on. Plus “Three
Unreasonable Phenomena” (unreasonable charge, unreasonable penalty, unreasonable apportion) and
“eating, taking, blocking and demanding”, medium and little enterprises are forced to take on heavy
financial burdens. Above phenomena all influence the normal produce and management activities of
medium and little enterprises, in a large extent increase their financing burdens and block their
development.
3 The Improved Method of Resolving the Financing Difficulties of SMEs
It’s a collective effort for the whole society to solve the financing difficulties. It is critical to build the
reasonable market financial relationship among enterprises, governments and financial institutions, to
speed the further reformation, to develop a comprehensive lawful and financial system for SMEs. SMEs
ought to improve the ability of internal accumulation and management quality. The government should
create the relevant policy, develop the credit guarantee system and widen the direct financing source for
SMEs. In the meantime, indirect systems, the current main methods, need improving. By doing so, the
problem could be resolved.
3.1 Nurture the self-accumulation ability in SMES
According to a market research, in other market-economic based countries, 60 % of capital is from
enterprise itself, 10% to 20% is from loans, and the rest is from bonds and public organization. SMEs in
China can not just rely on the external sources rather than strengthen internal competence. Therefore, it’s
essential to create a self-accumulation policy, which is adjusted to the economic development.
3.2 Improve the management, increase the corporate transparency
In the process of management, enterprise should act in reasonable transparent way, obtain credible
source by promoting its own creditability and reduce the possibility of “uncertain situation” to build the
foundation "relationship lending"
3.3 Create and improve the relevant policy
We should create SME Act according to the characteristics of Chinese SMEs to confirm the SMEs’
important role in the development of economy, to ensure the basic principle, and to protect the
legitimate rights of SMEs. On one hand, varies organizations and agencies should cultivate a good
environment according to financing system. On the other hand, by learning from the experience of
developed countries, the laws of SME financing and legal system should be improved on.
3.4 Develop the SMEs credit guarantee system actively
The government should establish and improve SMEs credit guarantee and reduce risk and loan cost
by using of risk-sharing mechanisms. On one hand, according to the market operation, we should
encourage and support the commercial security agencies, improve the capital supplementary
mechanisms and risk-control mechanism. On the other hand, local governments can disperse SMEs load
guarantee risk by setting up insurance and retrocession system. SMEs’ obtain the insurance for loans,
consequently, risks are reduced and loan interest rate will get down.
3.5 Accelerate reform of the banking system and encourage small and medium-sized commercial
banks
China should set up of small banks or community banks. A large bank needs explicit rules in the
leading process to avoid distortions. Because there are fewer intermediaries between top management
and lending offices at small banks, management of small banks can grant loan officers more discretion
in the lending process. Besides small banks and community banks are more likely to have private
information about potential borrower because of proximity and personal relationships between bankers
and enterprisers, thus small banks can provide good services for SMEs.
3.6 Constitute credit rating system for SMEs
The future development of SMEs is determined by growth. The conditions of finance indicate the past
558
of the enterprise. If companies paid more attention to their finance and capital, it was possible to lose
many potential enterprises. In conclusions, banks should adjust methods and build the credit rating
system for SMEs to accelerate SMEs’ development.
4 Conclusions
We should establish a comprehensive system to improve the development of SMEs, which includes
strengthening the finance institution's sustain to the SMEs improving the enterprises' quality,
constructing the social serving system establishing the social credit system and opening some new
financing channels.
，
References
[1] Li Yanyan, The Location of the State Government in the Circulation of Funds Among SMEs Can be
Seen From the Small Business Administration of U.S.(SBA), Commercial Research 2002,
12:125~127 (in Chinese)
[2] Liu Shan, The summarization of the Theory of SMEs financing, Nankai Economic Studies, 2005,
1:108~112 (in Chinese)
[3] Liu Xinhua, Wen Xian, The commentary of the theory of SMEs financing in China, Economist,
2005.2:105~111 (in Chinese)
[4] Rebel A. Cole, Lawrence G. Goldberg, and Lawrence J. White, Cookie Cutter VS. Character: The
Micro Structure of Small Business Lending by Large and Small Banks, Journal of Financial and
Quantitative Analysis, 2004, 2:227~251
[5] Suo Jian, International Comparison of the Development of SMEs, China Social Sciences Press, 2001
(in Chinese)
[6] Yu Jianguo, Wu Xiaohua, Analyzing Financing Difficulties of SMEs on the basic of
Macro-economics Research on Macro-economics, 2001,5:35~40 (in Chinese)
[7] Zhao Xu, Wu Wang Yanzhong, Financing Difficulties and Structural Characteristics of SMEs in
China, China & World Economy, 2004, No.2 (in Chinese)
[8] Chongfeng, International Comparison of Financing Basing on the Regional Economy. Research on
World Economy, 2004.5:53~58 (in Chinese)
[9] Wang Hu, The Exploration of Establishing the Social Service System for SMEs, Shanghai Academy
of Social Sciences Quarterly,1999,3:24~31 (in Chinese)
[10] Wang Haizi, Research on the Direct Financing of SMEs, Shanghai Economics Studies,
2001.9:53~59 (in Chinese)
，
559