ARVIEN VEDA A.

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SME FINANCE
SME or Small and medium-sized enterprises are nonsubsuduary, independent firms that employ
fewer than a given number of employees. The most common upper limit designating an SME is 250
employees, as defined, for example, by the European Union. Many SMEs remain informal. Data on
informal SMEs are very hard to find, but it is safe to assume that, if they were included, the statistics
illustrating SMEs importance to the economy would be even higher.

The large size of informal sector is often associated with high costs of formality. For example
costs of verification of property rights , cost of filling taxes, tend to have a stronger adverse effect on
SMEs, because the are less likely to be able to afford those costs than large enterprises. So it’s not
surprising that countries with large informal sectors usually have more predominant SMEs.

Why SMEs have less access to finance? There are many possible reasons why an SME may not
be able to get financing from the financial system:

1. Lack of projects with positive net present value that would justify bank financing
2. Lack of management skills and their interest in expanding their business
3. Natural limits to the size of an enterprise or optimal size for some industries
4. Lack of collateral that the banks require to give them a loan
5. Complex application procedures to get a loan
6. The size and maturity of the loan are not sufficient to meet their needs

Lending tehnology is a unique combination of

1. Primary information source

The primary information source would include information about the house,
collateral. For example, when was it built, what is the size, and information about
yourself, for example what is your occupation.
2. Screening process
It would usually ask for a house inspection, and conduct an appraisal to verify
how much the house is worth. It would also want to verify your income with your
employer and the bank where your salary is deposited
3. Loan contract : Loan or credit line
All this information would then determine the loan contract that the financial
institution would offer. For example, maturity, interest rate, the size of loan
4. Regular monitoring
Then after the loan is given, it would conduct regular monitoring. Typically, the
financial institution would want to stay in touch with the insurance company to
ensure that the houseremains insured and may also conduct reappraisals to
verify that the house is still worth more than the size of loan.
 Relationship lending is often considered to be the lending technology most suitable for SME
lending. Relationship lending is not easy for a financial institution. When executed properly, it requires a
great deal of effort to obtain information about the borrower, understand its financial needs, design the
right type of loan, assess repayment ability, and then monitor loan performance. Transaction lending is
based on hard information about the borrower. For a large firm, the choicewould be between buiding a
banking relationship or simply seeking a loan on a one-off basis form a transaction lender.