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Financing in SMEs

Financing in SMEs

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Published by Saira Jii

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Published by: Saira Jii on Jul 21, 2011
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Report of Marketing Research


Financing in SMEs
Presented By:

SMEs are defined as companies with full-time employee not exceeding 250 individuals in case of manufacturing and 50 in case of trading (this conforms to the definition used by SBP Prudential Regulations for Small and Medium Enterprises Financing).

‡Financing and Capital Structure of SMEs is different from Large firms * SMEs are comprised of 90% of Pakistan and gives Livelihood to 80% people and is 40 % of GDP 44% rural establishments and 56% urban * SMEs have pecking order of preferred Capital Resources .

CHARACTERSTICS of SMEs ‡ Limited Funding and Limited Access to Capital Market ‡ Different stages of SMEs ‡ Start Up Phase ‡ Established Phase ‡ Matured Period .

78% 10.98% 28.82% 20.59% 25% 23. Startup Stage: ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ *Self Financing *Short Term Debt *Medium Term Financing *Self Financing *Short Term Debt *Medium Term Financing *Self Financing *Short Term Debt *Medium Term Financing 68% 20.08% 21.79% ‡ Established Stage: ‡ Matured Stage: .57% 32.RESEARCH ANALYSIS AT DIFFERENT STAGES 1.

financing and Quality of Labor are hurdles ‡ ‡ ‡ ‡ Major Areas of SMEs in Pakistan 1.7% 3. Construction 4% ‡ Short Term Working Capital Financing . Manufacturing 42% 2. Commerce & Trade 32.Finding Working Capital and Financing for SMEs Competition.

Working Capital Cycle .

4.Ways of Short Term Financing 1. Equity Trade Creditors Factoring Line of Credit Loans Short Term Loans . 2. 5. 3.

10. 5. 12. 7. 4. 2. 9. 6. 3. 11. Start-Up Financing Equipment Leasing Community Development Financial Institutions (CDFIs) Micro-Loans Asset-Based Loans Bank-Term Loans Private Loan Guarantees Angel Investors Business Incubators Direct Public Offerings Reverse Merger Initial Public Offering Institutional Venture Capital .These are some problemSources awoke the need of which 13 Funding Pencoder 1. 13. 8.

Evaluating Flexibility in SMEs ‡Flexible Financing ‡Rigid Financing ‡SMEs use 50% flexible Financing .

Credit Scoring Lending 4.Small Companies Credit Availability & Relationship Lending ‡ ‡ ‡ ‡ ‡ Types of Lending 1. Financial Statement lending 2. Asset Based Lending 3. Relationship Lending .

since the soft relationship information known by the loan officer cannot easily be observed. verified. . or transmitted to other decision makers within the bank.Bank Borrower Relationship and the process of Bank Lending ‡ Banks offering relationship lending must delegate more lending authority to their loan officers than banks focusing on transactionsbased lending.

Lease financing in small companies ‡ Lease is an agreement allowing one party to use another s property. or equipment for a stated period of time in exchange for consideration. plant. ‡ Lessor ‡ Lessee .

a leasing examination is very much like any other examination of asset quality. . the different types of leases. the examiner must understand the statutory and regulatory background of leasing. and how to account for leases. the reasons banks become involved in leasing. For the most part. the risks involved. The examiner seeks to understand and evaluate the bank s credit policies or practices and portfolio administration. measures. To determine whether the system is effective.Examining Leasing Operations ‡ Management should have a system that identifies. monitors. and controls the bank s risk exposure.

Risks associated with Lease Financing ‡ ‡ ‡ ‡ ‡ Credit Risk Interest Rate Risk Liquidty Risk Transaction Risk Compliance Risk .

Categories of Leases ‡ ‡ ‡ ‡ ‡ Capital Lease Operating Lease Sales Type Lease Direct Financing Lease Leveraged Lease .

and the lease terms. After these terms are reached in negotiations between the bank and its customer. the bank arranges for any necessary delivery and installation. . The bank should have a legally binding agreement to lease and a lease contract that incorporates all the points in the commitment letter. the cost. After purchasing the property. it may issue a commitment to lease describing the property.Documenting a Lease ‡ When a bank is asked to purchase property for lease. an order is usually written asking the bank to purchase the property.

Financing is Small Companies ‡ Debt Financing ‡ Equity Financing .

4. Financing Overview Legally Binding Loan Agreement Collateral List Loan Type Options Payment Schedule Outsourced Loan Servicing . 3. 5.Elements of Strong Loan Proposals 1. 2. 6.

2. 6. 4. 5.Typical Loan Approval Thought Process 1. 3. Management Experience & Expertise Detailed Business Plan Cash Injection Collateral Personal Character Credit History Personal Financial Statements . 7.

Choice between Flexible & Rigid Financing Correlation Between Optimal & Actual Level of Flexible Financing Limited Access to Long Term Loans= High Reliance on Flexible Financing Expensive Line of credit Longer Term Loans are harder to obtain so flexible are used mostly . 5. 4. 3.Conclusion & Analysis 1. 2.

Correlation between knowledge base and capital structure 2. Service sector firms are dominant in SMEs 3. Firms with low volatility of requirements use Flexible Financing Cash .Conclusion & Analysis 1.

Benefits: Lower WACC. As the bank loans are senior debt. Company can survive even at lower profit rates as they don t have to pay higher debt costs. Lower profit rates will lead to lower product prices. ‡ ‡ ‡ ‡ ‡ ‡ Companies should look to invest more equity by their own rather depending on Banks. that reduces the credit rating of the company and subsequent increase in the spread on funding by that company.Recommendations For Capital Structure in Pakistan 1. and Lower prices will leads to mitigate the current high rate of inflation. No obligation to fulfill debt covenants. . 2.

3. In current times. ‡ ‡ ‡ ‡ Banks should believe on Merit Financing instead of Relationship Financing Banks should prefer SME Lending rather than lending major groups Reasons: As it is given to 1 company. It will restrict proper money circulation. . when banks are facing liquidation problem.Recommendations For Financing in SMEs 1. and Repayment risk will increase. the number of beneficiaries of that money is low and limited. lending huge amount of money to 1 company will enhance the problem. 2.

Conclusion & Analysis 1. Correlation between knowledge base and capital structure 2. Service sector firms are dominant in SMEs 3. Firms with low volatility of requirements use Flexible Financing Cash .

target sector and target areas. . Timely disbursement of the loans. Banks are required to give loans on easy and flexible repayment terms. Prompt verification and internal working to enable quick and effective completion of the lending process. so bank should use easy and understandable language in public massages. and Lower markup rates and transaction costs. Require detailed market research to know the target market.Recommendations For Banks to Increase SME Financing ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ make easy Lending Policies Easy approach to Bank Lending Departments. Sales staff should be well trained. As most of the people related to SME sector are not highly educated.

Recommendations For Leasing * As most of the SMEs are in Manufacturing concern so they must use Leasing Facility .

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