Download Research of Financing Obstacles and Strategies of Small and Medium-sized Enterprises

ORIENT ACADEMIC FORUM
Research of Financing Obstacles and Strategies of Small and
Medium-sized Enterprises
ZHANG Xiaoming1, CHEN Jing2
1. School of Economics and Management, Beijing Jiaotong University, China, 100044
2. School of Finance, Renmin University of China, China, 100872
[email protected]
Abstract: Financing difficulty of small and medium-sized enterprises has always been the focus of
peoples. This article starts from analyzing the present situation of small and medium-sized enterprises in
China. It discusses the direct and indirect financing obstacles faced by small and medium-sized
enterprises, and then puts forward referenced policy suggestions. All of these are aimed to promote
vigorous development of China small and medium-sized enterprises, and enhance their contributions to
national economy.
Keywords: Small and Medium-sized enterprises, Financing Obstacle, Strategy
1 Present Situation of Small and Medium-sized Enterprises in China
Since reform and opening-up, small and medium-sized enterprises (Hereinafter called “SMEs”) have
been the major impetus of economic growth in China, and their existence as well as development play
an important part in the sustainable, stable, and healthy development of China’s economy. By the end of
September, 2009, the number of enterprises registered in All-China Federation of Industry & Commerce
has raised up to 10,300,000(31,300,000 privately-owned business not included). According to the
current standard of SMEs, there are 10,231,000 SMEs, more than 99 percent of all the enterprises. At
present, the final products and service values created by SMEs take up about 60 percent of GDP (Gross
Domestic Product). Taxes paid by small-and-medium enterprises take up about 50 percent of national
total tax account. SMEs provide nearly 80 percent of job opportunities in town and they absorbed lots of
surplus rural labor.
SMEs’ development helps to promote the establishment and improvement of market system. Practice of
developed countries indicates that, prosperity of market economy is the prosperity from the competition.
But, precondition of competition prosperity is the existence of enough independent SMEs. For example,
after World Wall , the economy miracle and prosperity of Germany mostly relied on the rapid
development of SMEs and fair-competition environment formed by them. However, SMEs are confront
with fund shortage which can’t be solved by market during their development, and in a way, fund
shortage has been the bottleneck restricting their development. (Hui Encai, 2010; Peng Runzhong Zhao
Min, 2010; Xu Li, 2010ect.) From a long-term perspective, if only developing small and medium
enterprises acquired considerable capital support, such a booming economy, hiring and economic
growth could still be a bit more stable and consistent. In a long run, if only SMEs get powerful fund
support, the prosperity of China, the rise of employment and economy is hopeful to come into the orbit
of material rising.
From a global perspective, shortage of funds and relatively poor credit conditions are general problems
that plague the development of SMEs. On the one hand, SMEs are of small size, variable business, high
risk and low credit capacity. On the other hand, funding is a special service product. It is vulnerable to
erosion in rental or commission operations and becomes the so-called “Bad debts”, not to return and
compensate. The resulting economy and social impact are with the chain and integrity. Therefore,
precautionary principle is widely adopted in financial intermediation by owners of the general funds or
financial institutions. Thus, financing difficulty of SMEs is congenitally doomed. Below we will probe
into the barriers of SMEs from the two perspective of indirect and direct financing.
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2 Analysis of the Financing Obstacles of China’s SMEs
2.1 Indirect financing obstacles
2.1.1 Discrepancy between the demands of SMEs and the bank system
China’s financial system was established back in the late 70s with mainly state-owned banks serving
state-owned sectors, thus the lack of financing institutions answering the financing aspiration of the
rapid expansion of SMEs. Considering the diversification of the totality of the China’s economy, it
hasn’t been settled well that the overall financing system should provide the different economic bodies
with different solutions, the asymmetry has appeared between the economic system and the financing
structure, and among them the private-owned small businesses are at an automatic disadvantage status.
R
R
R
R0
R1
R2
Q0
Figure 1
Q1
Q (S/D)
Figure 2
Q (S/D)
D
S
Q2
Q (S/D)
Figure 3
(Note: Figure 1 Equilibrium between supply and demand in the capital market with completely symmetric
information; Figure 2 Supply and demand of capital with information asymmetry; Figure 3 Supply and demand of
capital with information asymmetry)
2.1.2 Information asymmetry between banks and enterprises
Under the condition of completely symmetric information, the capital market will be cleared in
equilibrium price which is rate R0, with the result that all financing demand will be satisfied if supply is
not limited (Fig.1). However, the assumption of completely symmetric information can’t be made to
meet in real world. Even if we don’t consider the information cost, we can’t get exact information about
how the future will be because of the limitation on human’s rationality, cognition, calculation ability and
knowledge. So information asymmetry is the basic feature of human activities.
Under the condition of information asymmetry, assuming that capital demand does not change, <1>
when the capital supply curve is a vertical line (Fig.2), the price elasticity of capital supply is 0, which
means the one which supply capital are only willing to provide the capital Q1 no matter how high the
price that the one which needs capital would like to offer. As a result, not all the capital demand can be
satisfied. <2> when the capital supply curve slopes downward (Fig.3), there occurs a strange
phenomenon that the higher price the one which need capital would like to offer, the less the capital
suppliers are willing to provide instead of more. These two kinds of situations will be met when banks
loan money to small-and-medium-size enterprises. In capital market, information asymmetry definitely
leads to credit risk and it’s costly to gain information about the debt side. Because of small size and high
risk of their management, it costs banks more to gain information about the credit status and the state of
operation of SMEs than big enterprises as well as with higher credit risk. As a result, to reduce the
operation cost and risk, commercial banks will set up credit limit, which makes it difficult for SMEs to
get a loan as shown in Fig.2 and Fig.3.
2.1.3 Lack necessary social guarantee mechanism.
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In order to avoid the risk, banks almost don’t issue loans except to some big enterprises and regardless
of the size and the length of time, clients can only get loans with previous credit records as well as on
condition that they have conducted the guaranty of mortgage. So it excludes numerous high-tech or
growth-oriented enterprises that have no record of profits and no credit record. In addition, when they
want to get loans, a considerable number of SMEs, due to its credit deficiency, can’t provide adequate
and effective assets mortgage or pledge but need to gain external access to credit guarantee. Because of
the high risk of credit guarantee, large companies and government departments don’t want to provide
credit guarantee for SMEs. The lack of effective guarantee and relative social guarantee mechanism is
the main obstacle for SMEs in the process of financing from financial institutions.
2.2 Direct financing channels are blocked
China's capital market has gone through 10 years. By December 25th, 2009, the total market value of
Shanghai and Shenzhen storm market has been more than 23000 billion yuan. There are 1,695 A share
listed companies in total. At the same time, Growth Enterprise Market (Hereinafter called “GEM”) was
also launched in 2009. So far, 36 companies have listed in GEM and it has brought fresh blood to
A-share market. But comparing with millions of small and medium enterprises in China, GEM didn’t
provide enough support for them, and there is still a large space for development. In addition to the
stock market, Chinese bond market and bill discount market are not developed, which can’t meet the
financing needs of SMEs. The distempered risk investment mechanism in which exit is the premise of
entrance also slowed the development of venture capital in China. This greatly restricted the growth rate
of small high-tech enterprises in China.
3 Strategies to Remove Obstacles of SMEs Financing
3.1 Establish and develop medium financial institutions system to provide services for SMEs
The deepen reform of market economic system have leaded to eternal multilevel of Chinese enterprises
and division of financial services. This impels state-owned commercial banks and small and medium
financial institutions to form their own service advantages, so that they can serve the development of
enterprises better. The government should take positive measures to encourage the establishment of
small and medium financial institutions. People’s bank of China should support those established small
and medium sized banks, rural banks and credit unions that have good business and actively support the
development of small and medium enterprises in re-loan and other aspects. People’s bank of China
should support bill rediscounted business and if the bill rediscount ratio is linked with credit extended to
small and medium enterprises, more credit, more rediscount, banks will have more motivation to
develop new small and medium sized customer base.
3.2 Establish the system of credit evaluation for SMEs
Credit rating can be the standard to tell the credit for the loan, which can play an important role in
gaining trust and project capital from financial and insurance institutions. China must begin with address
this point in the credit management system, otherwise the risks of bank credit and enterprises enquiry
will climb. The credit evaluation for SMEs must put into accentuation of the small scale of loan, fast
circulation, unpredicted period, reducing too excessive dependency on accounting statement,
highlighting practical check, keeping an eye on enterprises’ performances, taking a differently standard
from big enterprises by most authoritative evaluation organizations to assess risks fairly of loan for
SMEs. Different rates generally made based on quality of manager, performance of enterprises ,solvency
of debts, credit record and development perspective, to cut down effectively cost on seeking information
for them.
3.3 Focus on financial innovation to avoid credit risks
Banks make efforts to employ new financial products, taking the problem in gaining loans or guarantees
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into thinking. As for loans, except direct loans ,banks can also offer bank bill, loans by commercial bill
discounted, or using credit of buying party, to provide loan to product-using enterprises, allowing them
paying financially in advance, in this way, the capital problem of high-tech small enterprises; as to
guarantee, flexible ways can be used, such as equity pledge, intangible assets pledge like parent right,
factory facilities mortgage, professional business right mortgage, payment guarantee and so on. But each
one need complete formalities, abiding by laws, even some need evaluation from or trusteeship by
professional agencies. Only under these conditions, not only enterprises can get loans, but also banks
can avoid risks.
3.4 Realize the diversification of direct financing channels for SMEs
The practice of enterprise development shows: when the scale of an enterprise develops to a certain
extent, it will enter into the stage of capital management when the enterprise can only develop through
direct financing channels. Therefore, to develop capital market to open up various forms of venture
capital financing channels, to encourage the civil risk investment by allowing the SMEs to enter into the
capital market to issue shares and bonds so as to diversify sources of investment of enterprises, are not
only an important choice about project financing, but also the inherent requirement to promote the
science and technology innovation and to develop high-tech industry and new economy.
China should establish and improve the venture investment market. Based on knowledge and high-tech,
venture investment, is an investment on the production and management of technology-intensive
innovative products and services. It is an investment that specializes in buying shares of small and
medium-sized enterprise with new ideas and new technology, and promotes the establishment of the
SMEs. In a mature capital market, venture investment market is not only an important source of capital
for a newly established firm and enterprises that are in shortage of capital, but also an ideal financing
channel for listed companies looking for sources of capital. America's experience has shown that:
venture investment plays a very active role in promoting the rapid development of the high-tech
industries by creating a large number of commercial “miracles” such as Microsoft, Google, Yahoo,
Apple ect.
Our country should further expand the scale of GEM and encourage SMEs to become listed companies
to finance in the market. The function of GEM mainly lies in providing a special financing channel for
the promising newly-emerging SMEs, especially the high-tech ones as well as establishing an exit
mechanism for venture investment. Therefore, the establishment of GEM will no doubt bring good
opportunities of development to SMEs which take up 98% of the total enterprises in China. But how to
increase the liquidity of GEM and attract more investors to participate is the key to the success of the
GEM. A very important reason of the success of America’s NASDAQ market is that it adopts the
market-maker system successfully. Therefore, we should consider changing single automatic
deal-making system to diversify trade systems, which means we adopt the market-maker system on
small stocks and stocks that are not active in order to strengthen market liquidity and stability.
3.5 Intensify government support.
Financial obstacle of SMEs almost exists in every country, fact tells us by foreign countries that, the
rapid development of SMEs depend on the support from government. For example, Japan formulated
particularly policies on loans for facilities modernization and rent system for SMEs, providing long-term
loans without interest. USA has established capital aid system for them in 1950, which can offer loans
directly by government, including direct loans, coordinated loans and guaranteed loans, all with lower
interest than that of market through the department for SMEs .
References
[1]. Tang Jushang. Small Enterprises in Foreign Countries–Financing, Managing, Innovating and
Moding. Beijing: China Jihu Press (in Chinese)
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[2]. Cao Fengqi. Establish and Improve Credit Guarantee System for Small and medium-sized
Enterprises. Financial Research. The fifth issue, 2001 (in Chinese)
[3]. Hui Encai. Research on Pressing Forward Development of Small and medium-sized Enterprises.
Compare Economic and Political System. The third issue, 2010 (in Chinese)
[4]. Peng Runzhong Zhao Min. Financing Problem under Financial Crisis of Small and medium-sized
Enterprises in Asia-Pacific. Asia-Pacific Economy. The econd issue, 2010 (in Chinese)
[5]. Xu Li. Financing Bottleneck of Small and medium-sized Enterprises in International Financial
Crisis. The first issue, 2010 (in Chinese)
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