Problems Obtaining Credit for SMEs
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This chapter reviews the loan availability, procedure and condition and several problem faced by small and medium enterprises in obtaining credit facility from commercial banks. Firstly, the chapter focuses on the types and condition of credit facilities. Secondly, the chapter overview the procedure when obtaining loans. Finally, the chapter explores the problem faced by SMEs in obtaining loan.
2.1 TYPES OF CREDIT FACILITIES OFFERED BY COMMERCIAL BANKS FOR SMALL AND MEDIUM SIZED ENTERPRISES
The commercial banks are the most important player in the banking system. As at the end of December 2010, there were 9 domestic and 14 locally incorporated foreign commercial banks (BNM, 2011). Below is the list of licensed commercial banks as at 31 December 2010:-
Commercial banks (Locally owed)
Affin Bank Berhad
Alliance Bank Malaysia Berhad
AmBank (M) Berhad
CIMB Bank Berhad
EON Bank Berhad
Hong Leong Bank Berhad
Malayan Banking Berhad
Public Bank Berhad
RHB Bank Berhad
Commercial banks (Foreign owed)
Bangkok Bank Berhad
Bank of America Malaysia Berhad
Bank of China (Malaysia) Berhad
Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad
Deutsche Bank (Malaysia) Berhad
HSBC Bank Malaysia Berhad
Industrial and Commercial Bank of China (Malaysia) Berhad
J.P. Morgan Chase Bank Berhad
OCBC Bank (Malaysia) Berhad
Stardard Chartered Bank Malaysia Berhad
The Bank of Nova Scotia Berhad
The Royal Bank of Scotland Berhad
United Overseas Bank (Malaysia) Bhd.
Commercial banks offer various types of credit facilities to SMEs. There are working capital loans, fixed assets facilities and trade financing facilities. Besides that, Credit Guarantee Corporation (M) Scheme also offered by participating commercial banks. Credit Guarantee Corporation was established with the purpose to help Small and Medium Scale Enterprises (SMEs) without or with insufficient collateral to obtain credit facilities by commercial banks (Telekom Malaysia Berhad, 2010). CGC is participating with commercial banks which include Malayan Banking Berhad, RHB Bank Berhad, AmBank Berhad, CIMB Bank Berhad, EON Bank Berhad, Affin Bank Berhad and OCBC Bank Berhad (Business Loan for SME, 2011).
Working capital loans is available to finance the shortfall in working capital requirement such as bank overdraft and revolving credit. (Eddie, 2006) Overdraft facility is convenience SMEs to draw additional funds immediately from current account (Eddie, 2006). Besides, the facilities fast in raising capital to operation for business and making investment. Bank overdraft has no fixed repayment schedule, interest will charged when the funds are utilised and no commitment fee for individual applicants on overdraft amounts of RM250,000 and below (Public Bank Berhad, 2011).
Revolving credit is a working capital facility normally helpful as short term working capital funding. Borrowers can decide to either repay the full amount or renew the loan tenure by servicing of the interest at the end of the loan period. For SMEs borrower, commercial banks allow the flexibility of drawing funds as and when required, the repayment period is over 1 to 6 months term. A part that, SMEs can choose to repay in full upon maturity or to pay only the interest but the minimum amount of RM100,000 (Public Bank Berhad, 2011).
Table 2.1 Asset conversion cycle
Debtors credit terms
Creditors credit terms
Asset conversion cycle
If the forecasted sales turnover is RM5 million, then the Working Capital Requirement will be 90/365 x RM5.0 million
= RM1.23 million
For the purpose of fixed assets financing is to finance property, plant and equipment acquisition and also cost of construction for factory and shop house. Term loan, leasing and hire purchase are the credit facilities types of the capital expenditure financing (Public Bank Berhad, 2011).
A term loan is a fixed amount of loan from a bank for a period of time and repaid according to specific repayment schedule. The borrowers must be able to manage the cash flow effectively for repayment the loan (Public Bank Berhad, 2011).
Trade financing helps to control the companies' trade transactions and international business community. There are two group of trade financing which are local purchases or sales, import or export services. For local purchases and import services, Public Bank Berhad providing the number of credit facilities which are letter of credit, trust receipt, banker's acceptance and banker's guarantee. For local sales and export services offering banker's acceptance, banker's guarantee, bills of exchanged purchased and export credit refinancing (Public Bank Berhad, 2011).
Credit Guarantee Corporation (M) Scheme includes Credit Enhancer Scheme and Direct Access Guarantee Scheme. Credit Enhancer Scheme eligibility must be Malaysian owned, borrower must have favourable financial record and business enterprises based on the definition of SMEs. Type of facilities offered by Credit Enhancer Scheme is term loan, Overdraft and all type of trade facilities. Total loan amount up to RM10 million. Guarantee cover has 2 portions which is secured and unsecured. The BLR rate is 6.3% (RHB Banking Group, 2011). Maximum interest rate for each guarantee cover percentage bond for Credit Enhancer Scheme as follows:
CGC Guarantee Cover
80% - 100%
BLR + 1.00%
70% - 80%
BLR + 1.25%
60% - 70%
50% - 60%
BLR + 2.00%
Free to quote
Table 1: Interest rate according guarantee cover percentage
According to past researcher Daniel Dusanjh, Direct Access Guarantee Scheme can be obtained in CIMB, Maybank and Ambank. Credit facility is range from RM50,000 to 3 million. The interest rates for DAGS ranges from 1.00% to 1.75% + BLR.
Past researcher Daniel (2009) said that CIMB Bank offers credit facility under Government Assistance Scheme which is Fund for Small and Medium Industries and . In addition, CIMB Bank also provides Small Entrepreneur Guarantee Scheme.
Fund for Small and Medium Industries 2 and New Entrepreneurs Fund 2 eligibility criteria include business enterprises based on definition of SMEs, shareholder fund could not more than RM2 million, public listed and government link companies shareholding not more than 20%. In addition, the Malaysian resident shareholding must at least 51% and the SMEs not exceeding 7 years in operation if more than 7 years in operation banks will consider provided average net profit over the last 3 years. The interest rate for FSMI 2 is 4% to 6% based in risk assessment of SMEs. Credit facility is range from RM50,000 to RM5million. Credit facility could be term loan and overdraft and maximum term of 5 years (CIMB Bank Berhad, 2011).
Small Entrepreneur Guarantee Scheme offers much different terms, maximum loan amount is RM50,000 with an interest rate of 1.5% per annum + BLR. It should be noted that this scheme covers much micro businesses (CIMB Bank Berhad, 2011).
Commercial banks in Singapore offer various types of credit facilities to small and medium sized enterprises, including working capital financing, fixed assets financing, specialized financing, trade financing and government assistance scheme.
Working capital financing is vital for the growing business. The purpose is to finance the everyday business operations. A number of general types include factoring loans that give credit for account receivables, overdrafts facility utilized when business make payment exceeding the balance in current account, and revolving loans that the loan amount can be re-borrowed (Government of Singapore, 2009).
Factoring loan is an account receivables sold to bank for immediate cash. A charge of 1-3% levied on gross invoice value or an interest of 5-8% per annum. Most of commercial banks in Singapore have this type of loan such as DBS Bank Ltd, HSBC Private Bank (Suisse) SA and Malayan Banking Berhad (Government of Singapore, 2009).
Bank overdraft is the cash ready for any business need and also means that withdraw from bank exceed the available balance. Interest charge for bank overdrafts are normally 1-2% above prime rates. Most of commercial banks in Singapore have this type of loan such as DBS Bank Ltd, HSBC Private Bank (Suisse) SA, Malayan Banking Berhad, Standard Chartered Bank and United Overseas Bank Limited (Government of Singapore, 2009).
Revolving credit is loan sum available for fixed period during which amounts repaid may be re-borrowed. For revolving credit, company assets such as machinery may have to be provided as collateral. . Most of commercial banks in Singapore have this type of loan such as DBS Bank Ltd, HSBC Private Bank (Suisse) SA, Malayan Banking Berhad, Standard Chartered Bank and United Overseas Bank Limited (Government of Singapore, 2009).
For fixed asset financing, commercial banks offer commercial, industrial and property loans. Like hire purchase is the most common loans for fixed asset financing, the purpose is to finance the business property, machinery and motor vehicles. During the settlement of hire purchase loans, banks will hold the legal rights over the asset until fully repaid. The commercial banks can finance up to 90% of equipment price (Standard Chartered Bank, 2011).
Specialized financing is the loans are aimed for sector specific SMEs such as shipping, real estate or dealership. Maybank provide the loans of car dealership and vessel (Maybank, 2011). Another way, OCBC Bank offer shipping, real estate and commercial property loans.
In Singapore, government assistance scheme separate to 2 groups which are local enterprises financial scheme and internationalization finance scheme. Local enterprises financial scheme is typically granted for modernization and upgrading the plant and equipment, expanding the manufacturing capacity. Working capital loans facilities and fixed assets financing loans facilities are available under local enterprises financial scheme. Working capital loans include Micro Loan Program and Loan Insurance Scheme. For the Micro Loan Program, maximum loan amount up to S$100,000. This type of loan is unsecured term loan and the loan term is from 1 to 4 years. The minimum of interest rate is 5.5% per annum. Eligibility of this type of loan with no more than 10 employees and the SME must incorporated in Singapore with no less than 30% shareholding (OCBC Bank, 2011).
Loan insurance scheme offers an option access to funding for local enterprises through the use of loan insurance (UOB Bank, 2011). This type of scheme do not have limit amount but the insurer has veto right over S$1 million. Now, the government would focus in improving loan insurance schemes to assist small and medium enterprises (Ryan, 2011).
Table 2: Credit Facilities Offered to SMEs in Malaysia and Singapore
Type of credit facilities
Maximum Loan allowed
Interest rate per annum
Public Bank Berhad
RHB Bank Berhad
EON Bank Berhad
Working capital loans
Fixed assets loans
Government Assistance scheme
Credit Enhancer Scheme
Fund for Small and Medium Industries 2
Fund for Small and Medium Industries 2
Small Entrepreneur Guarantee Scheme
99.9% on cost
1 – 6 months
Normally 3 to 5 years. Longer tenure may be considered on a case-to-case basis.
Case by case basis
1.5% per annum + BLR
Guarantee by director and shareholder
Maximum guarantee cover of 80% by Credit Guarantee Corporation (CGC).
Maximum guarantee cover of 80% by Credit Guarantee Corporation (CGC).
OCBC Bank Berhad
UOB Bank Berhad,
Working capital loans
Fixed assets Loans
Government Assistance Scheme
Micro Loan Program
Loan Insurance Scheme
90% of the equipment price
SGD 15 million
Interest and principal payable at the end of each advance period
Up to 5years for new equipment placed in Singapore, Up to 8 years
out of country
1%-2%on prime rate
1.125% of insurance premium
90% co-sharing of risk with SPRING Singapore
co-shared with 75% risk borne by the insurers2.2 PROCEDURE AND CONDITION FOR OBTAINING LOAN
In Malaysia, there are several procedures and condition needed for SMEs in obtaining loan. The loan application process generally has three broad stages. These are business plan preparation, the submission of the loan application and the assessment of the loan application (Banking Info, 2011).
First stage is preparing the business plan, commercial banks will require information regarding the company before they make decision whether to grant a loan to it. It is essential to provide the full and complete information on the company, the reason is to ensure the loan processing complete smoothly. For a small and medium enterprise, the preparation of a business plan is significant. Business plan is outlining the vision and how the companies manage to achieve the objective. In the business plan, the written must be simple and clear (Banking Info, 2011).
Second stage is the application process, to accelerate the application process, applicant should send a suitably completed loan application form together with the business plan and all appropriate documents as required by the commercial banks. Loan application forms and loan application checklists are different in each commercial bank. Although the application forms and checklists are different but required document more or less the same for verification and evaluation (Banking Info, 2011). According to Chuah Mei Lin, there are two checklists provided by commercial for SMEs applicant. The first checklist written down the general types of documents and data required and second checklist setting out the more specific documents or information required for the kind of application facilities. She said that the banks will ask for additional information and documents if get insufficient data (SME Corp, 2010).
The following is the documents required for the loan application:-
Statutory Documents for Corporation
Memorandum and articles of association
Certificate of incorporation (Form 9)
Return of allotment of shares (Form 24)
Register of directors (Form 49)
Copies of directors' or guarantors' IC
Form J of directors or guarantors
Documents for Partnership and Sole Proprietorship
Business registration and license
Income tax return
Form J of partner or proprietor
Financial and Management Documents
3 years audited financial statements (certified by auditors for non corporations)
6 months current account statement provided by other financial institutions
All borrowings disclosure and letter offer by other financial statements
Loan repayment statement utilisation from other financial institutions
Business and cash flow projection
Major customers and suppliers list
Receivables and Creditors Aging
Most up-to-date management accounts
Feasibility report (for project financing and new ventures)
Company and director's profile, business plan
Apart on above documents provided, small and medium enterprises also require prepare the security documents such as valuation report, photocopy of sale and purchase agreement and relevant collateral such as land title deed. Other relevant documents such as invoices and commercial document, documents to prove other source of income also need to submit to commercial banks (Banking Info, 2011).
Commercial banks could perform interviews and carry out a site visit to business premises for the intention of understands the business and clarification. This is to facilitate the commercial banks to verify and measure company's financial position (Banking Info, 2011).
The last stage is assessment of the loan application. Commercial banks will access the credit application after the borrower submission all the documents required. For assessment the loan application, commercial banks would view for certain basic requirements, for example the business viability, capacity to make repayment for loan application, whether the loan application is for business development, and credit history with commercial banks and to assess whether the risks are acceptable. Besides, commercial banks will also assess for the business's credit risks that are called 5Cs, character, capital, capacity, conditions and collateral. Commercial banks will analysis 5Cs to decide approval or rejected the loans (Banking Info, 2011).
According to Chuah Mei Lin, commercial bank will use 14 to 30 days to process the application depend on the size of the loans. If commercial bank approves the loan application, they will issue a letter offer to the applicant within three working days (SME Corp, 2010). A letter offer will state the term and conditions. The borrower should understand all the term and condition write down in letter of offer. The common term and condition include periods for repayment and payment in default, submission of financial statements, while the company change the nature of the business and the requirement of the borrower After the loan approved, the borrowers can utilised it within 5 working days. If decline offer, the companies can appeal against facilities (Banking Info, 2011).
2.3 PROBLEM FACED BY SMALL AND MEDIUM ENTERPRISES IN OBTAINING LOAN
SMEs have difficulty in obtaining credit facilities from commercial banks when compared to large industries during crisis period even in normal period. The main reason always is low profitability earn by commercial banks. Almost all commercial bankers in the world will interest in the profitability business. Since loaning is the principle activity of a banks and it is its responsibility to make sure that all monies lent out are collectible. As such, commercial banks make sure that the creditworthiness of borrower will repaid the loan through assessing the information provided by applicants. (Anna, 2008)
During global economic crisis, loans will be difficult to obtain especially risky loans will become increasingly strict (Factoring Financing Articles, 2011). This is bad news for SMEs since they form the riskiest borrowers. Due to the loan condition of commercial banks too strict, SMEs faced the problem in obtaining loan (Hongbo and Xiaojie , 2009).
Insufficient collateral and social guarantee system
In Malaysia, some small and medium enterprises do not qualify to obtain credit facility from commercial banks. Such as lack of collateral which is the big issue in obtaining credit facilities from commercial banks. The low value of outdated equipment is difficult to collateral as the credit facilities. (Kian Seong, 2010). Collateral is essential because it decrease the credit risks of commercial banks.
In Singapore, Gabriel (2009) said that small and medium enterprises are facing problem in securing essential loans. For unprecedented crisis facing by SMEs, the government assistance schemes still do not far enough and not suitable. But the real problem is the commercial banks unwilling to lend the loan under government scheme because they reluctant pay the cash first. Although the government willing bear 50 to 80 percent of risks but the government guarantee portion is difficult to claw back. But if the borrower cannot pay up, the government agreed to bear the risk for the portion of loans. Most of the SMEs companies need working capital financing that is cash overdraft. For working capital loans, government assistance scheme usually do not seem to provide.
In China, when SMEs applying loan who face strict condition for mortgage (Hongbo Duan, Xiaojie Han & Hongbo Yang, 2009). Customer's asset mortgage as the basis of the commercial banks decided whether to approve the loan application. It means that SMEs insufficient collateral assets, and cannot be effectively secured. Most of SMEs do not meet up the conditions of the collateral assets. SMEs always have lack of plant and equipment for collateral through the view of enterprise asset structure. For the moment of the loan application, the equipments are outdated, the collateral value of which is relatively low (Jiantuo, 2007).
Another problem faced by SMEs is the enterprise's property legal rights, it is because a huge number of SMEs is having the joint cooperation. This joint cooperation will lead to the ownership of property, plant and equipment and other real estate property not apparent. Therefore, the fixed assets do not used as loan mortgage. Simultaneously, due to the high cost and complicated process of mortgage register, the SME get that guarantee from mortgage will much more difficult (Xiao Li, 2003).
To carry out the protection act, SME loan guarantee must refers to the method of assurances of the debt agreement. The warrant's credit is increased when all the way through utilize of third-party credit with reward. At that moment, both sites credit can turn to a balance and the capital achieves to a proper scale (Xiao Li, 2005).
Even if local governments put more and more efforts to develop credit guarantee institutions for SMEs, they are still facing many problems.
SME credit warranty institutions help out the small and medium enterprise to get multi-funding for capital collection. But too small of the capital scale warranty institutions also cannot assist more in SME financing. In most areas of SME warranty funding is governmental financial funding. Although the government put effort to help out SMEs but it is still far from their needs for warranty funding. SMEs still seek for other credit financial support. Simultaneously, issue small loan and bear higher cost in financing also the problem faced by small warranty funding institutions (Xiao Li, 2005).
Commercial banks will not simply recognize the information prepared by warranty institutions. Because of the existing tax revenue, bank management system and information service centre cannot obtain a full business and personal records (Howrey 2011). So, bank has to face more risks in lending loan to SMEs.
Interest rates and processing costs
In Malaysia, raise in interest rate is one of the problems faced by SMEs. SMEs cannot bear those high interest rates. While commercial banks willing to gain high profits, small and medium sized enterprises will be hard to negotiate low interest rates with them. Commercial banks are rejecting the application of small loans due to high supervision and monitoring costs. Commercial banks judge the SMEs as riskiest borrower because of their insufficient assets to fulfill requirement, low capitalization and high mortality rates. For this situation, to raise the fixed and working capital from commercial banks is harder.
According to Fazlur (2011), SME face difficulties because of the bank reluctance provide loans to them. Many banks are unwilling issue loans to them because of high processing costs and monitoring costs. In addition, interest rates for SME loans are high due to the high processing costs.
But CEO of Unique Trust, Capt rtd Prince Kofi Amoabeng said that they must express disapproval the government to take some decisions to force interest rates down, because low interest rates will lead to the banks stop loan to the SME sector so SME is going to suffer. Therefore, they all have to go to the non-bank financial institutions where they would be given the loans at even higher interest rates (Fidel Amoah, 2011).
Poor documentation and management
Malaysian' SMEs are always regarded as higher risk borrower because of their poor documentation. SMEs have no lucrative projects, low quality, real estate title deed is not clear, no clear business aims and succession business plans, and no available credit history. Besides that, small and medium sized enterprises unable to give necessary documentation like financing accounting and track records for application of credit facilities. Due to that heavy documentation needed by commercial bank so they will delay the processing of application loan(Gloria, 2010).
In India, small and medium enterprises suffer losses in their business so they always provide bad track record for application loans. Besides that, SMEs seldom have a long history so they usually hard to get loan (Gandhi, 2011). According to Executive Director of First Banc Mawuli Hedo, it is possible to reduce the rate of bank facilities but majority of the SMEs do not provide proper documentation (Obeng-Sakyi & Sobgbodjor, 2010).
In Thailand, the major obstruction for SMEs is facing several financial problems which include trouble in debts and lack of working capital. SMEs have facing problem in obtaining loan from domestic commercial banks especially in business of handicraft products. They have deficient plant and equipment and do not use standard accounting procedures. (Arunee and Anongnart, 2000).
From the SMEs' opinion, they have been complained that shortage of information and guidance provide by commercial banks, complication and trouble related to credit facilities application procedure, insufficient requirement of SMEs, high interest rates charged, and lack of collateral are the major problem access to finance (Sinswat and Subhan, 2010).
From the commercial banks point of view, the main obstructions for loaning to SMEs consist of lack of collateral provided by SMEs, inadequate business experience, poor management, untrustworthy accounting system, no business plan, no long credit provided, high transaction and operational costs per SME loan application (Sinswat and Subhan, 2010).
In China, most SMEs companies' financial performance is not satisfactory by commercial banks. SMEs companies always with low level of average profit because they are in high competitive industries. In addition, their bankruptcy rate is very high for the reason that they are easily affected by business environment, sensitive to the effects of variables and risk. They have poor supervision and sense of credit. As such, after suffering from a huge loss, SMEs normally cannot raise any corrective measures. They attempt to be delayed the payment for interests and principle and let the lending bank suffer the loss. Furthermore, SMEs is difficult to meet the requirement or condition in the way of operation scale and business capacity due to the present credit assessment system is set for large size enterprises (Xiao Li, 2003).
With unofficial financial accounting and poor management, so SMEs unable to meet the bank collateral conditions and guarantees due to commercial banks offer most of mortgages loans is secured by real estate. As most SME loan is an urgent require for capital due to short-term liquidity stress, for term of revolving credit cannot be correctly measured and the probability of overdue payback is relatively high. Commercial banks have problems to assess SME's production business when confront with such complicated SME market (Yanan Chao, 2010).
Rejecting Loan Application
In Malaysia, if refer to the form of cash flow in SME Company, know that inability to generate cash to repay the loan, commercial banks automatically will rejecting loan application (Banking Info, 2003). SMEs will face problem in obtaining loan such as the commercial banks rejecting loan application, the general reason include poor credit history, inadequate capital commitment, inadequate supporting documents, unacceptable financial problem, lack of financial information and doubtful repayment ability. Besides that, the borrower is the high risk enterprises which overdependence on a single purchaser or dealer (SMI/SME Business Directory Malaysia, 2010).
HSBC Bank Malaysia Bhd managing director Thomas Varughese said that the top issues to reject loan application is the applicant do not provided enough financial information. Besides that, SMEs do not perform well in managing their financial position. Another issue for rejecting loan application is the poor credit history for the enterprises, director and guarantors. (Kian Seong, 2010).
Reduce the facility
In Malaysia, Banking info (2003) recorded that commercial banks perform periodical review of their credit risk profile of existing loans and based on this assessment, if their assessment proves a high default risk profile, the commercial banks will reduce the amount of credit facility.
In India, if the SME companies without increasing the security, commercial banks will maintain or reduce the credit facilities (Aditi, 2005).
In Singapore, Hng Kiang (2009) said that the SMEs credit facility from commercial banks is secured by strong collateral, but they also will reduce the credit facility during the recession period.
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