PETALING JAYA: Faced with difficulty in obtaining financial support from banks, small and medium enterprises (SMEs) are turning to alternative forms of financing to keep their businesses afloat, exposing themselves to higher costs, a business leader has warned.
Small and Medium Enterprises Association (Samenta) chairman William Ng told FMT Business that poor documentation and unfavourable financial results are the key reasons why SMEs fail to secure bank loans.
Other reasons include a lack of working capital and insufficient cash flow, a Samenta study conducted in July has revealed.
Such challenges are not new, according to Ng. SMEs were already struggling to secure bank loans even before the Covid-19 pandemic.
However, things have become much worse after the nation went into a series of lockdowns over the past two years.
“The pandemic affected the ability of many SMEs to operate. As a result, their financial records for 2020 and 2021 have turned out to be less than ideal. This makes it difficult for banks to approve loans to them,” he said.
That has caused them to look towards alternative forms of financing to support their business ventures, Ng added.
One such avenue is peer-to-peer (P2P) financing, which allows businesses to raise funds from investors via online platforms.
Other SMEs, however, have had to turn to unlicensed moneylenders for advances, incurring much higher interests as a result.
From the bank’s perspective, however, loan approvals have improved significantly for SMEs this year, as compared to 2021.
Head of community financial services at Maybank, Hamirullah Boorhan said the approval rate in the second quarter of this year (2Q22) was much higher than the same period last year.
“The approval rate increased by 21.7%, driven by higher loan applications received,” he said.
Hamirullah pointed out that loan applications are assessed based on several specific criteria, including proof that the applicant has adequate cash flow to maintain its business.
He said that to ensure their loan applications are approved, SMEs must maintain proper financial records. He recommends the use of digital banking solutions, which will make record-keeping much easier.
“SMEs must also show clarity in their cash flow projections. This is important as it shows the repayment capability of the company’s current business operations,” said Hamirullah.
Ng believes the time has come for banks to show greater flexibility by considering alternative data for loan approvals, including business data such as sales trends, asset ownership and market leadership.
Some banks are already starting to look at these as part of the loan approval process, he said.
Ng expressed hope that Bank Negara Malaysia can take the lead by identifying a broader set of criteria that banks can rely on when they process applications for loan.
“This will give smaller businesses a better chance to secure the financing they need,” he added.
Source: https://www.freemalaysiatoday.com/category/highlight/2022/10/19/rejected-by-banks-smes-forced-to-seek-alternative-financing/