PROBLEMS OF SMEsPROBLEMS OF SMEs IN IN OBTAINING FINANCEOBTAINING FINANCE

Presented byPresented by : : Reuben Saliba Reuben Saliba Manager, SME UnitManager, SME Unit

Bank of Valletta plcBank of Valletta plc

PROBLEMS of SMEsPROBLEMS of SMEs

OVE R VIE W DE FINIT IONC haracteristics

andSources

PR OBL E MS R ISKASSE SSME NT

ofproposals

SME - BANKR elationship

Business C entres:C atalyst C om m un ication

& F ac i li tator

OVERVIEWOVERVIEW

Economy is characterised by a multitude of SMEs.

STATISTICSSTATISTICS 22386 enterprises22386 enterprises 45 establishments employ - 200 persons45 establishments employ - 200 persons 95%95% micro businesses micro businesses (majority of which are (majority of which are

services related including wholesale, retail, services related including wholesale, retail, transport, catering, recreational businesses.)transport, catering, recreational businesses.)

4%4% small businesses small businesses 1%1% medium medium

A large segment of the Maltese economy follows A large segment of the Maltese economy follows European trends.European trends.

Micro

Small

Medium

THE EU PERSPECTIVETHE EU PERSPECTIVE

European research established thatEuropean research established that :BanksBanks look on how to develop an effective and look on how to develop an effective and

efficient relationship management policy as a efficient relationship management policy as a main problem.main problem.

SMEs believe that Banks :SMEs believe that Banks : charge too muchcharge too much are excessively risk-averseare excessively risk-averse have high collateral requirementshave high collateral requirements lack risk capitallack risk capital are insufficiently transparentare insufficiently transparent behave inconsistentlybehave inconsistently

European research established thatEuropean research established that /cont…

Accountants see Banks as: concentrating too much on risksconcentrating too much on risks not valuing adequately the qualities of the not valuing adequately the qualities of the

entrepreneurentrepreneur not relying on the future cash flownot relying on the future cash flow being detached from their customersbeing detached from their customers

TheThe banking needsbanking needs of business of business customers are seen as having :customers are seen as having :

low transaction costslow transaction costs low interest rateslow interest rates transparent relationshiptransparent relationship sufficient amounts of lendingsufficient amounts of lending flexible borrowing arrangementsflexible borrowing arrangements

The Bank’s point of viewThe Bank’s point of view

Banks operate on thin margins and while their Banks operate on thin margins and while their downside is 100%, their upside rarely exceeds downside is 100%, their upside rarely exceeds 5%.5%.

To control their risks, Banks must thereforeTo control their risks, Banks must therefore use formal screening procedures including use formal screening procedures including

classification of risk.classification of risk. demand various levels of securitydemand various levels of security

It is common for Banks to be confronted with It is common for Banks to be confronted with absence of a track record, incomplete financial absence of a track record, incomplete financial data or lack of collateral.data or lack of collateral.

Challenge to BanksChallenge to Banks

Improve efficiency by applying latest Improve efficiency by applying latest information technologiesinformation technologies

developdevelop standard financing productsstandard financing products identify profitable market segmentsidentify profitable market segments find solutions to problems caused by find solutions to problems caused by

lack of collaterallack of collateral extend product portfoliosextend product portfolios

DEFINITIONDEFINITION

Characteristics & SourcesCharacteristics & Sources

Characteristics of SMEsCharacteristics of SMEs3 main characteristics :3 main characteristics : Economic FactorsEconomic Factors

small share of market i.e. not dominant of small share of market i.e. not dominant of operationsoperations

Owner ManagerOwner Manager frequently involved in day-to-day running of frequently involved in day-to-day running of

business in a personalised way and not through business in a personalised way and not through a formalised management structure.a formalised management structure.

IndependentIndependent does not form part of a large group which can does not form part of a large group which can

provide a financial umbrella.provide a financial umbrella.

EU Definition of SMEsEU Definition of SMEs

An enterprise having :An enterprise having : less than 250 employeesless than 250 employees annual turnover not exceeding EUR 40 million annual turnover not exceeding EUR 40 million

approx. (£23 million)approx. (£23 million) balance sheet total not exceeding EUR 27 million balance sheet total not exceeding EUR 27 million

approx. (£15 million)approx. (£15 million) No corporate company (non SME) owning more No corporate company (non SME) owning more

than 25% of capital or voting rights.than 25% of capital or voting rights.

Local CriteriaLocal CriteriaWho classifies as an SME ?Who classifies as an SME ?

Self EmployedSelf Employed where the no. of employees does not exceed 5.where the no. of employees does not exceed 5.

SmallSmall no. of employees does not exceed 10 (EU -50)no. of employees does not exceed 10 (EU -50) annual turnover does not exceed Lm400,000annual turnover does not exceed Lm400,000 where the total assets of the company does not where the total assets of the company does not

exceed Lm200,000.exceed Lm200,000.

Local CriteriaLocal CriteriaWho classifies as an SME ?Who classifies as an SME ? / /ContCont......

MediumMedium number of employees does not exceed 55. number of employees does not exceed 55.

(EU - 250)(EU - 250) annual turnover does not exceed Lm1,600,000.annual turnover does not exceed Lm1,600,000. total assets does not exceed Lm800,000total assets does not exceed Lm800,000..

Sources of FinanceSources of Finance

Own resources / personal funds / internal financing Own resources / personal funds / internal financing (ploughing back profits into business)(ploughing back profits into business)

Creditor finance Creditor finance Loans from relatives and friends Loans from relatives and friends Government support - through Malta Enterprise & Government support - through Malta Enterprise &

Kordin Business Incubation CentreKordin Business Incubation Centre Joint venturesJoint ventures Business AngelsBusiness Angels Alternative company listings on stock exchangeAlternative company listings on stock exchange Financial intermediariesFinancial intermediaries

PROBLEMS of SMEsPROBLEMS of SMEs

OverviewOverview

Lack of managerial competenceLack of managerial competence

- no formal training in professional - no formal training in professional managementmanagement

Insufficient start-up capitalInsufficient start-up capital Size of local marketSize of local market Limited finance resources / access to Limited finance resources / access to

capital marketcapital market Communicating abilitiesCommunicating abilities

Problems encountered with BanksProblems encountered with Banks

Financial monitoring - forecast & actual cash Financial monitoring - forecast & actual cash flowflow

Setting up a sideline business - drain effectsSetting up a sideline business - drain effects Lack of monitoring of individual business Lack of monitoring of individual business

activitiesactivities Misuse of overdraftMisuse of overdraft Keep up to date with competition Keep up to date with competition (especially (especially

retail outlets).retail outlets). Wrong assessment of start-up costsWrong assessment of start-up costs..

Accounts prepared for ‘Tax purposes’Accounts prepared for ‘Tax purposes’ Ongoing relationship with Branch Ongoing relationship with Branch

managermanager Dissipation of profits into luxury itemsDissipation of profits into luxury items Turnover dependent on 1 customerTurnover dependent on 1 customer

Problems encountered with BanksProblems encountered with Banks /cont.../cont...

Other problemsOther problems

GearingGearing

- to what extent is the business - to what extent is the business financed through capital/retained financed through capital/retained profits & other shareholders’ profits & other shareholders’ fundsfunds

Lack of planningLack of planning

Extended credit periodsExtended credit periods

RISK RISK ASSESSMENT ASSESSMENT

OFOFPROPOSALSPROPOSALS

Points looked for by BankPoints looked for by Bank (1)(1)

Background & track record Background & track record (i.e. ability & (i.e. ability & integrity of proprietors)integrity of proprietors)

Overall objectives of the business Overall objectives of the business (purpose)(purpose) Product or service provided by the business.Product or service provided by the business. Market where the business operates Market where the business operates (the (the

changing competitive environment)changing competitive environment) Customer base of the business.Customer base of the business. How the business sells its productsHow the business sells its products Pricing policyPricing policy

Promotion and distributionPromotion and distribution CompetitionCompetition Physical resource requirements of the businessPhysical resource requirements of the business Human resource requirementsHuman resource requirements Up-front contributionUp-front contribution Repayment feasibilityRepayment feasibility SecuritySecurity How well is the customer prepared to do How well is the customer prepared to do

businessbusiness

Points looked for by BankPoints looked for by Bank (2)(2)

SME - BANKSME - BANKRELATIONSHIPRELATIONSHIP

The basis of such a relationship is theThe basis of such a relationship is the Method of CommunicationMethod of Communication which is thewhich is the cornerstone of any successful cornerstone of any successful organisation.organisation.

Effective bank/business communicationEffective bank/business communication.. Allows banks to respond earlier to the needs Allows banks to respond earlier to the needs

of the business.of the business. Improves risk managementImproves risk management Reduces reliance on collateralReduces reliance on collateral Improves opportunities for cross selling.Improves opportunities for cross selling. Enables bank to provide better advice & Enables bank to provide better advice &

supportsupport

To this effect, the Bank has To this effect, the Bank has embarked on an ambitious embarked on an ambitious

project in changing its project in changing its traditional methods of traditional methods of

communicating with its communicating with its customers : this includes customers : this includes

altering the physical layout of altering the physical layout of its branches.its branches.

This relationship concept led to the This relationship concept led to the setting up of the setting up of the firstfirst SME Support UnitSME Support Unit in Malta.in Malta.

The main objectives of the Unit were :The main objectives of the Unit were :

•Analyse the state of health of a businessAnalyse the state of health of a business

•Identify solutions to financial problemsIdentify solutions to financial problems

•Discuss and develop a Business PlanDiscuss and develop a Business Plan

•Prepare and submit an application to the Bank or Prepare and submit an application to the Bank or

other intermediaries for financial assistanceother intermediaries for financial assistance

As part of the business As part of the business segmentation process the segmentation process the

Bank established five Bank established five Business Centres to cater Business Centres to cater for a more personalised for a more personalised

service and a quicker service and a quicker decision process.decision process.

Bank Business SegmentationBank Business Segmentation

Branches cater for business proposals up to Branches cater for business proposals up to Lm30,000.Lm30,000.

Business Centres cater for proposals between Business Centres cater for proposals between Lm30,000 up to Lm500,000.Lm30,000 up to Lm500,000.

Corporate Centre cater for corporate customer’s Corporate Centre cater for corporate customer’s proposals in excess of Lm500,000.proposals in excess of Lm500,000.

Business Centres aim to broaden the Business Centres aim to broaden the customer’s business horizons through:customer’s business horizons through: Own internal network.Own internal network. Mediterranean Bank Network.Mediterranean Bank Network. Overseas Correspondent Banks.Overseas Correspondent Banks. Bank own overseas rep. Offices.Bank own overseas rep. Offices. Representation in Malta Enterprise.Representation in Malta Enterprise. EU Framework Programmes.EU Framework Programmes. Representation in KBIC.Representation in KBIC.

Other Business Centre functions:

Thank youThank you