An Analysis of Causes for SMEs Financing Difficulty

ABSTRACT
SMEs have an extremely important position in national economy and social life, especially in the aspect
of solving employment and promoting urbanization, what is irreplaceable by large enterprises. However,
at present the SMEs financing issue in China has already become a serious problem that troubles the
economic development, market growth, and social progress. This issue has aroused a wide attention
from economic theory field, industrial field, and the government. This paper summarizes the causes for
SMEs financing difficulty comprehensively, with the hope of offering references for further studies.

1. Disadvantage conditions for financing

-Banks to issue loans for SME means high transaction costs that the banks want to avoid. High costs
serve as a hindrance for SME to get into banking credit.
-Credit rationing, usually are caused by incomplete information and information asymmetry that make
SME compared to larger companies suffer this kind of problem. Also, the management style and
behavioral characteristics have a high uncertainty which makes the risks for banks to offer loan seemed
greater.
-Short business life, SME face a great risk of disappearing or exiting from the market after a short
period of operation thus, makes the risks for bank to issue loans higher. According to the study, It is
estimated that nearly 23.7% of small enterprises disappear in two years and nearly 52.7% of small
enterprises exit the market in four years due to business failure, bankrupt, or other reasons.

2. Worse credit of SMEs and single financing channel

-With the macro environment today, SME grows slowly which makes it difficult for to build up credit
and since SMEs normally dont have wide financing channel they depend on state-owned banks. State
owned banks do not enter the market completely, when public-to-public credits are at risk it is hard to
settle. So, state-owned banks are not SME friendly in a sense and set restriction for issuing loans
especially, in mortgage and other loan-related requirements. Also according to them, since the SMEs
great needs, the bank cost a lot in operation added to that is the fact that, SME does not have a
financing guaranty system. But if the SME is a normal stock enterprise where the law mandates for it to
offer guaranty for other enterprises, it should follow the regulations of the law. This only means that
even the government advocates banks to offer loans for private enterprises, banks find it risky and
difficult due to SMEs defects and one of them is credit issue.
-Therefore, it is said that the relationship between SMEs and banks is not in harmony. It is evident with
the results of the survey presented in the study, in which the loan get by SMEs is about 0.5% of large
enterprises. But in applying loans, SMEs have to follow the complicated procedures similar to large
enterprises. For one loan, banks have to take five times of management costs by offering the loan for
SMEs than for large enterprises.

3. The direct financing channel for SMEs is almost closed

 -Aside from the credit issue, there seems to be another problem SME and it is now in terms of their
almost closed financing channel. Since security market is domination by state-owned enterprises, SME
find it hard to enter or occupy any position in the market. SMEs are into private financing but the laws in
China made them face a major issue on direct financing that made them face the lack of capitals and in
using it effectively. Another is as the study noted, In Chinas financial system, the capital market,
compared with the fund market, is imperfect. It lacks of a multi-level capital market that can offer
financing services for SMEs. With the present laws and regulations on listing financing and issuing
securities are not good for SMEs. It is hard for SMEs to get funds by direct financing, such as debts or
stock financing.

4. Funds and guaranties are useless

-SMEs dont have sufficient assets that they could use for guaranty. Without effective assets from
SMEs to guaranty for banks to offer or issue loans, there can only be a little way to escape risks. And the
banks and credit guaranty institutions will still find it difficult to support SME effectively.

5. It is not easy to depend on enterprises self-accumulation or leaders personal credit

-Qi Zhao, the vice president of Yuyang Group, has said: The bank always loves the rich the hates the
poor. If you have more assets, he would like to marry his girls to you. If you just start your business, he
would not give you money by all means. SMEs should not hope to get money from banks.
- It is common in the present, with the condition of no direct or indirect financing; enterprises had no
other choice but to finance themselves. With this, it is hard for SME to accumulate capital because of
low interest and profits.

6. Restriction of financing characteristics

-Mentioned in the study that, the financing of SMEs is usually featured with small, frequent, and
fast. As soon as SMEs find business opportunities, they immediately look or apply for credits; however,
state- owned banks follows strict procedures and operational standards before issuing loans, which could
not fulfill SMEs needs for financing.