[dropcap]S[/dropcap]mall Medium Enterprises and Small Medium Industries (SME/SMI) provide the majority employment opportunity in Malaysia, even higher than the local giant corporations and the multi-national corporations. Yet, they are the ones who find it difficult to get funding from banks. During the online training session I hosted featuring Ching Chee Pun, CEO in GBC Corporate Advisory Sdn Bhd and Senior Partner in Oscar Wealth Advisory Sdn Bhd, he shared about the top reasons why SME/SMIs find it so difficult to get business loan. Below is what he said:
I extracted these figures Sin Chew newspaper: only 20% of the 560,000 SME (Small Medium Enterprise) manage to get bank loan. I didn’t get any updated information for this since, but I believe the current successful rate is higher. However, overall, it’s still very poor. My estimation now is that there is about 30% SMI/SMEs that are able to get bank loan now. That means that there are still 70% out there that are not qualified.
Why did these 70% SMEs do not qualify? Also that’s why most of time they could not expand because they cannot get the funding from banks. Let us go into some keys problems.
#1. Banks thank that Applicants are Unable to Pay Back
Number one is the bank assessor thinks that the applicant does not have the ability to pay the loan. Basically, the bank will look into the applicant’s accounts. If this shows that the applicants’ account or bank statement has no money, then it’s very hard for the bank to give you a loan.
#2. Purpose of loan is not aligned with the loan applied for
For example you are doing a printing business. If banks see you that are doing well in your business of printing, they’ll lend you money for doing your printing job. However, if the reason you want to get funding from the bank is to do property investments, the bank will then say, “No, the money I lent to you is for business, it is not for investment, because you might not be good in investment.”
This is where a lot of people make a mistake. They are too honest to the bank. They just say, “Oh, I want money because I’m buying properties or doing investment.” Apparently, the bank will not allow this.
#3. Unsatisfactory Financial Results
This is very common. Your account shows that you are not doing well financially. Most of the time, some SMIs are actually doing well. It’s just their account that is not showing all the good figures. This might be due to some hidden reasons that the account is not showing high profits.
#4. Other Substantial Borrowing Resulting in High Gearing
This one is quite common as well because every company has debts. Let me just give you one easy to understand example: Let’s say a company is having a sales turnover of RM1 million per year. The maximum loan that the bank can lend to the company is about 30% of the turnover. So the maximum loan the bank can lend to this company is only RM300,000. If this company has RM200,000 loan already. When the owner is doing a new loan application, the new maximum loan that can be approved is only RM100,000. That means if you have a lot of debts, you might not have room for that new loan.
#5. Unsatisfactory Conduct of Current Account
The next one is CCRIS problem and CTOS problem. This is very common nowadays. Let us talk about these three points together.
With CCRIS, Bank Negara is keeping a system to keep track of everybody. For example, if I paid my current installment to the bank two months late, then my CCRIS will probably show two months late.
Let’s say you are continuously a few months late in loan payment, the Bank Negara will assess you and see your personal CCRIS report. They will check the company directors and check your company as well. So, your CCRIS report will show two months of late payment. The bank will then say, “Oh no, I won’t give you a new loan” because your CCRIS shows that your character is not good since you have two months late payment to other financial institutions. This is a character assessment. So, CCRIS is basically showing your character in repayment to your outstanding loan.
In the case of CTOS, let’s say you are doing business and somebody is suing you for a certain amount. When the banks check the CTOS records, they will say find out that someone is suing you for 10 million, 20 million etc.
Regarding the conduct of current account, bank will ask for your bank statement because they want to take a look at your bank manners and at the pattern of how you conduct your current account.
Let’s look at a case where this guy’s current account shows a bounced cheque. A bounced cheque means there is an insufficient fund in the account to clear the cheque. In other words, that means you owe money because you issued a bounced cheque. When they review the current account they will see the bounced cheque, they will see your shortage of fund.
This shows your character. The bounced cheque, or returned cheque, or shortage of funds, all these will show them you don’t manage your fund well and they will reject your application.
#6. Over-dependent on one buyer or supplier
The next point is that banks look at other payment as well. When business is over-dependent on one buyer or one supplier. Or your business is a one-man show. Let’s say the key person falls sick or even accidentally die, or whatever, then the business will collapse. That’s why banks sometime will think twice before they approve loans when they see your company is too small or it’s a one-man show.
There are also cases where the business only have one big customer, 100% of goods or services are sold to this one and only customer only. What if the only customer left you? Your business might collapse overnight. Banks do assess this area too.
#7. Nature of Business
Bank will also assess the nature of your business to see whether you qualify or not, especially in cash nature of business like restaurants. In this kind of business, most revenue is in cash form. Although you receive cash, sometime, you might keep your suppliers are credit. To the bank’s eyes they’ll think that since you receive cash and yet you pay late to creditors.
There are also certain industries that bank are wary of like the construction industry, gambling and lately, the shoemaker industry because there’s one big shoes maker in Northern Region defaulted their loan. These are the industries that banks are scared of.
#8. Lack of Financial Commitment
When you look at a mortgage loan, the bank gives you up to 90% home loan. Meanwhile they expect you to pay the 10% down payment balance. This shows that you also need to commit financially to the investment.
Some business owners don’t understand that when they borrow from bank, bank also wants to make sure that the businessperson is committed to his/her venture. Banks will say, “Okay, you need RM500,000? I will lend you RM300,000 and you must commit the balance of RM200,000 you must commit.”
I think I have covered most of the common issues that are faced by the SMI/SMEs. Of course we have ways to overcome them. I compiled the solution into the 5Cs method.
[highlight]If you want to learn more about the 5C solution method, watch the full training replay here.[/highlight]