A vision for SME Finance



As a tribute to my former colleague at SB Corp., Charles Belgica, who recently passed on to the next life unexpectedly, I wish to share excerpts from the work he put in to a policy paper on SME Finance. Charles has been a silent partner in my espousal of a risk-based lending framework for SME lending. My hope is his work will not be forgotten as new advocates build on his ideas.

In this paper, Charles described an ideal scenario in which small entrepreneurs were nurtured by an environment with a support system of enabling finance providers.

It is a state of affairs worth sharing with the readers, and definitely worth aspiring for.

From the moment a business is conceptualized and incubated, the entrepreneur is given the technological support to develop the product or service, depending on the nature of the enterprise. Positioned in a multiplex of offices and workshops in an enterprise incubation center close to the academe, the entrepreneur works with the help of experts to develop the product. This stage is financed by a venture capitalist or by the owner-entrepreneur himself using his own investment.

The turnout, if successful, brings the enterprise to the next stage of development. It applies for a patent and registers its products or technology with the Intellectual Property Office (IPO). When the product or service becomes ripe for commercialization, it then requires additional funding, which can come from investors (equity financing) or from debt (bank financing), or from additional investment from the entrepreneur.

The entrepreneur is no longer averse to equity financing because he understands how it works and is safeguarded by the institutions helping him develop the enterprise. The entrepreneur would most likely avail of financing for the business from both equity and debt sources as he deems appropriate for the business and as advised by his technical consultants.

The financial institutions, especially the smaller banks, providing financial assistance and lending to SMEs are partly funded by government FIs. They are also enabled by a government agency that is mandated to develop SMEs to equip themselves in lending to SMEs.

Capacity building, on the other hand, will likewise assist the SMEs. The entrepreneur will be able to source trainings, consultants, mentors, and benchmarking opportunities from these institutions at reasonable and oftentimes subsidized rates.

Graduating microenterprises (those that started out as microenterprises but have grown through the natural business incubation process) can readily access financing for their expansion into SME status. This financing, usually debt financing, will be provided by loan conduits that are recipients of wholesale funds. These graduating micros will go on to become small, medium and ultimately large enterprises. Those who fail to move forward will either go bankrupt or reinvent themselves to engage in another business.

SMEs that fall into insolvency can file for bankruptcy and benefit from the protection of our bankruptcy laws.
The business will be liquidated in an orderly manner and its resources are well accounted for, such that plans of launching another business endeavor could start on a clean slate, unhindered by creditor and liabilities claims.
Competent managers and loan officers knowledgeable in risk-based lending and best banking practices run the financial institutions. They have trained under the Capacity Building Program of government and are duly certified in SME lending. They know how to read financial statements. With fully capacitated SME lenders, SMEs will have greater access to financing because the former gaps and bottleneck to access will have been addressed. This includes concerns over information asymmetry, financial literacy, credit risk management, and lack of good governance practice.

For SMEs to grow and graduate to become bigger in size, they must have access to equity and debt financing.
They will have options on where to get financing. They may, likewise, be listed on the stock market, with listing requirements more reasonable and fit to the size and nature of SMEs. Moreover, the general public will be more knowledgeable about the stock market and are able to actively participate in the trading of stocks. In short, there will be more capital available for SME development.

Financial institutions will be encouraged to lend to SMEs. Aside from being fully equipped to assess and evaluate borrowers, they will have an option to secure guarantee for their loans to SMEs through an efficient and effective guarantee system. The guarantee program will be simplified – will require only the minimum documentation and streamline processes. Guarantee calls will be paid within a week’s time unlike the previous system that entailed months of waiting. Various insurance products and services, which will mitigate losses in the event of calamities, and other disasters that would cause default in loan repayment, are available. In addition, an enterprise rehabilitation financing facility will be made available to businesses struck by natural and even man-made disasters. They will be able to refinance their loans or refinance their businesses so that they can resume normal operations. Losses will be less painful and recovery easier.

Entrepreneurs are no longer hindered by high transaction cost in their effort to start-up businesses. Policy to make it easier to start a business will be in place. These policies will cover reasonable transactions costs and streamlined procedures and requirements. Likewise tax incentives for growing SMEs will be granted to deserving businesses.

There will be a level playing field for SMEs with potential to grow big. SMEs will be given a fair share of opportunities and support to become viable and successful business. New industry players will emerge from the ranks of SMEs competing in the international market place.

Benel D. Lagua is EVP and head of the Development Sector at the DBP. He is an active Finex member and a prime advocate of risk-based lending for SMEs. Feedback and comments are welcome at benellagua@alumni.ksg.harvard.edu


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