Finance is an essential aspect of running a business. Its primary role is to make sure there are enough funds for a company to operate and that such funds are being spent and invested wisely. In essence, the importance of finance lies in its ability to keep a business operating seamlessly without running out of cash while securing funds for long-term investments at the same time.
Because of its importance in keeping a business running, it is necessary to ensure a company has sufficient access to finance. Particularly, small and medium enterprises (SMEs) need more financial channels to help them stay afloat in today’s increasingly competitive markets. However, in Southeast Asia, most SMEs face poor access to finance for various reasons, such as lack of collateral and absence of proven track records.
Here are 3 of the most important ways businesses and industries can increase SMEs’ access to finance.
1. Enhance Credit Reporting for SMEs
Information asymmetries are one of the major reasons SMEs face more difficulties obtaining access to finance than larger companies. Information asymmetries arise when borrowers know more about their financial situation and investment opportunities than lenders. This imbalance results in inefficiencies in the lending markets, as lenders have inadequate information to analyse the risk represented by potential borrowers.
To make borrowing easier more SMEs, an enhanced credit reporting system should be implemented. Business credit reporting essentially involves listing down specific information regarding a company, such as its ownership details, subsidiaries, business finances, risk scores, and any bankruptcies and liens. With a better credit reporting system, lenders can price their loans correctly, and borrowers can find it easier to secure reliable loans for commercial property and other business needs.
2. Increase Protection of Creditors in Secured Lending
In many developing economies, more than half of companies’ capital stock consists of movable assets like receivables, equipment, and machinery. SMEs, mainly, are less likely to have access to immovable assets like buildings and land. For this reason, movable assets are the primary type of property that SMEs can offer as collateral to secure financing. However, because of insufficient legal and institutional protections, banks and other financial institutions often hesitate to accept movable assets as collateral.
Some research studies have already shown that more robust legal protections for creditors lead to greater access to finance for SMEs. As creditor rights in secured lending increase, the financing gap between SMEs and large companies decreases. For this reason, governments might need to reevaluate their collateral laws and see to it that increased protection is afforded to creditors in cases of secured lending, regardless of whether the collateral is a movable or immovable asset.
3. Invest in Financial Literacy
Often, banks and financial institutions require businesses to have financial plans. However, many SMEs that need credit cannot prepare and produce these plans. This usually happens because SMEs generally use a single-entry accounting system, whereas financial institutions often expect to see something more complex.
Therefore, to increase opportunities for financing, SME entrepreneurs and managers must invest in improved financial literacy. Financial literacy means an individual or business’s ability to grasp and use various financial knowledge and skills, such as budgeting, investing, and financial management. By being financially literate, SME entrepreneurs and managers can make themselves more prepared and eligible to receive financing or secure business loans in Singapore.
There is no question about the role of finance in keeping businesses afloat in a competitive corporate world. The challenge mainly lies in ensuring that businesses, especially SMEs, have adequate access to financial channels. While industries recognise the enormous importance of finance in business, many SMEs still find it challenging to secure financing quickly due to the absence of an efficient credit reporting system, insecurity of creditors, and lack of financial literacy.
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