More liberal approaches to financing needed, say SMEs

 

Rigid lending criteria has been cited as one of the reasons SMEs have difficulty obtaining financing for growth and expansion. (Bernama pic)

PETALING JAYA: Small and medium enterprises (SMEs) want banks to depart from their rigid approach and become growth partners when assessing their creditworthiness.

They say banks should look at multiple considerations and offer more varied products that will benefit both lenders and borrowers.

Small and Medium Enterprises Association (Samenta) president William Ng pointed out that SME financing is a relationship business while SME Association of Malaysia secretary-general Chin Chee Seong said enhancing credit assessment can close the funding gap.

They were commenting on a call by Bank Negara Malaysia deputy governor Jessica Chew for a better solution to bridge the SME funding gap.

Speaking at the Malaysian SME national conference in Kuala Lumpur on Tuesday, she said enhancing the traditional role of banks is essential to deliver an effective SME financing strategy.

On the other hand, she said, it must also be acknowledged that banks have their limitations, especially when it comes to approving loans for new and innovative businesses in the early stages of their life cycle.

William Ng.

Ng said the main challenges that SMEs face when they seek funding are timeliness, availability of collateral, margin and additional costs such as fees and interest.

He said that while banks are in regular contact with SME owners to understand their needs, they are limited by what they can offer because of regulation and the need for oversight.

“Banks should be allowed to decide on their own risk appetite and come up with innovative products for their respective market segments,” he said.

“It is important for them to make the transition from their role as financing partners to become growth partners for SMEs,” he added.

Ng said many banks continue to look at key performance indices when, in reality, SME financing is a relationship business.

“It can be lucrative if banks look beyond profits from loans to offer other products such as cash management, growth financing as well as environmental, social and governance advisory,” he said.

Another issue that must be ironed out, Ng said, is the way banks assess the creditworthiness of SMEs.

“Banks, online marketplaces and anchor companies should also look at data on current sales and sales projections as well as real-time payment and supply chain information to improve credit scoring methods,” he added.

Chin Chee Seong.

Chin said that while traditional banks offer significant business financing, their rigid lending criteria, collateral requirements and risk-averse approach make it challenging for early-stage and innovative SMEs to get seed capital.

He said that using alternative data has the potential to improve credit assessment, and that could help to close the funding gap.

He said data such as transaction history, social media activity and utility payment history could offer a comprehensive view of an SME’s financial health, particularly those that do not have a credit history yet.

“This broader perspective can lead to more well-informed lending decisions, reducing risk for lenders and improving access to credit for SMEs,” Chin told FMT.

“This ultimately creates a more equitable financing landscape, fostering SME growth and contributing to broader economic development,” he added.

Chin said banks should also develop larger-ticket, longer tenure and more flexible financing solutions through risk-sharing arrangements.

Options for alternative financing, he said, include crowdfunding and peer-to-peer lending, invoice financing for immediate cash flow, government grants for strategic projects, developmental financial institutions for high-risk ventures, and trade credit for extended supplier payments.

“Expanding credit guarantee schemes like portfolio guarantees can also offer faster and more extensive credit enhancements for SMEs that lack collateral,” he added. - FMT