CREDIT ACCESS OF SMALL MEDIUM ENTERPRISE IN BATANGAS CITY

A Thesis
Presented to the faculty of
College of Accountancy, Business, Economics and
International Hospitality Management
Batangas State University
Batangas City

In Partial Fulfillment
of the Requirement for the Degree
Bachelor of Science in Management Accounting

By:
Bagsit, Trisha Mae B.
Dumas, Zyrell Angelie E.
Negre, Louise Bernadette M.

2022
 Chapter I

THE PROBLEM

This chapter provides the introduction, background of the study, statement of the

problem, theoretical framework, conceptual framework, significance of the study,

hypothesis, scope and limitations of the study and definition of terms.

Introduction

SMEs are regarded as the lifeblood of every country’s economy. Most corporate

majors today were the humble SMEs of yesteryear. SMEs are critical to the smooth

functioning of an economy by filling the gaps that large corporates cannot fill, as well as

supporting the large corporates by way of sub-contractors, and even customers are it

primary, secondary, or tertiary industries. Despite the SMEs' considerable contributions

to economies at large, SMEs in developing economies face difficulties in obtaining credit

from financial institutions. SMEs in the Asian region faces major challenges in obtaining

affordable credit mainly due to the non-availability of proper information and records

required by the financial providers (Koththagoda & Dissanayake, 2017).

Credit access is critical for the growth of small and medium-sized enterprises

(SMEs). It allows entrepreneurs to innovate, improve efficiency, expand to new markets,

and provide millions of jobs. Yet, in developing countries, the majority of SMEs are unable

to acquire the financing they need to reach their potential. Financing SMEs in the

developing world can be risky and expensive for lenders, leading to an estimated

financing gap of one trillion USD (International Finance Corporation, 2011).

 The difficulty among small businesses in the Philippines to access credit has been

worsened by the pandemic-induced recession, forcing entrepreneurs to shell out from

their own pockets to keep themselves afloat, Asian Development Bank (ADB) said. To

recall, an earlier ADB report in October noted that “access to credit is a chronic barrier for

SMEs to survive and grow” in the Philippines, even pre-pandemic (De vera, 2020). The

study of Finex & Acerd2004) study pointed out that the problem seems to lie not in the

supply of credit potentially available for SME lending but in the difficulty of access to these

credits. In theory, there should be sufficient credits for SME financing since banks are

required by law to allocate 8 percent of their loan portfolios to SME financing. At the same

time, government financial institutions have their own SME financing programs.

Nevertheless, private banks are reluctant to lend to SMEs because of their general

aversion to dealing with a larger number of smaller accounts. Moreover, many banks are

still not aware of lending to small businesses. Many SMEs cannot access available credit

due to their limited track record, limited acceptable collateral, and inadequate financial

statements and business plans.

However, most enterprises in Batangas City find it difficult to finance their ventures

with their own funds. Most SMEs are first primarily funded through internal sources, such

as owner-manager contributions. Since, finance is required throughout the life of a

business, and a considerable lot of enterprises in Batangas City have supported from

bank and other financial institution credits, entrepreneurs face challenges in accessing it

because SMEs either attempted to obtain credit but were unable to do so, or were able

to acquire credit and even at a rate that was insufficient to cover business requirements.
 Given the important role of SMEs in development, their difficulty in credit the claim

that lack of financing adversely affects their performance. The researchers conduct this

research study to determine and establish the challenges that SMEs face in accessing

credit in Batangas City. The researcher believed that this could greatly enhance

knowledge about credit management as an aspect of financial management and as

preparation for future involvement in the corporate world.

Background of the Study

This paper utilizes the credit access of small-medium enterprises all over Batangas

City. It discusses the challenges faced by small-medium enterprises in accessing credit.

Batangas City was chosen as the focus of the study because it also has many

SMEs and is the largest and capital city of the Province of Batangas, Philippines.

Batangas City is currently classified as one of the fastest urbanizing cities in the

Philippines which attract entrepreneurs to engage in business. Credit sources are really

important for the enterprise to develop. However, access to credit influence the enterprise

operations to a great extent, yet many SMEs ' potentials are often not fully realized due

to factors related to their small scale. Among many constraints, access to credit has been

identified as one of the key obstacles for SMEs.

Access to credit helps all firms to grow and prosper. However, lack of access to

credit is a major impediment inhibiting the growth of enterprises (GOK, 2005).

Furthermore, firms with greater access to capital are more able to exploit growth and

investment opportunities (Beck, Demirgüç-Kunt, Laeven, &Maksimovic, 2006). There is

no structured institutional mechanism to facilitate the flow of financial resources from the

formal sector through small financial institutions to such enterprises. Generally, such

enterprises operate on tight budgets, often financed through the owner's contribution,

loans from friends and relatives, and some bank credit. They are often unable to procure

adequate financial resources for the purchase of machinery, equipment, and raw

materials as well as for meeting day-to-day expenses. This is because, on account of

their low goodwill and little fixed investment, they find it difficult to borrow at reasonable

interest rates. As a result, they have to depend largely on internal resources. (GOK,

2005).

The researchers decided to conduct this study to help the owners enhance the

extent of analyzing the phenomena of the four challenges to credit access which are the

collateral requirements, cost of credit, availability of information on finance, and business

risks. Moreover, the researchers are more determined to pursue this study since they are

taking up Management Accounting. Researchers believe that it would be beneficial to

them as well as for future researchers shortly when they make their enterprise. It would

also help to gain more information for the owners that have problems in obtaining credit

for the researchers to know that they can use the information that would be obtained in

this study about the career and field that they have chosen.

By knowing these, the researchers may be able to help the enterprise and the

person organizing it to be able to understand how the challenges affect the accessibility

of credit by SMEs.
Statement of the Problem

This study aimed to analyze the credit access of small medium enterprises at

Batangas City.

Specifically, it sought to answer the following questions:

1. What is the profile of the respondents in terms of:

1.1 age;

1.2 level of education;

1.3 nature of business;

1.4 years of business existence;

1.5 number of employees;

1.6 start-up capital; and

1.7 duration of using bank accounts?

2. To what extent do the following challenges in credit access influenced by small medium

enterprise:

2.1 collateral requirements;

2.2 cost of credit;

2.3 availability of information on finance; and

2.4 business risks?

3. Is there a significant difference in the challenges in credit access when grouped

according to profile?
4. Based on finding, what course of action may be proposed to improve the measure of

access to credit of SMEs?

Theoretical Framework

The theoretical framework served as the basis of the researchers in formulating

the structure of their study. It outlined the different theories concerned with credit access

of small-medium enterprises in Batangas City about the collateral requirement, cost of

credit, availability of information on finance, and business risks. This is the theoretical

framework that gives insights and information on the challenges encountered in credit

access by those owners in every small-medium enterprise.

Credit constraints can occur when banks increase collaterals for loans. As a

result, low-interest borrowers may be removed from the list of potential customers and

banks may skip these customers. Challenges facing SMEs in accessing credit from

financial institutions found out that very few SMEs succeed in accessing funding from

financial institutions, the main reason being failure to meet lending requirements, chief

among them being the provision of collateral security. In effect, it may therefore be that

simple because banks approach the lending process in a risk-averse way to protect the

funds of savers, and thus turn down several propositions perceived to be ‘riskier’, that

there is an apparent ‘discrimination’ against for example women and ethnic minorities

(Tirimba, et.al., 2014).

The cost of credit accessibility refers to the amount of money the entrepreneurs

pay in process of borrowing money from financial institutions. High risks associated with
lending SMEs and fixed costs associated with acquiring sound information about the

borrower by financial institutions as the major driving force for the high cost of credit. High

transaction costs do therefore not only increase the cost of borrowing but can also restrict

access to finance for some borrower groups. While transaction costs are restraining for

all borrowers, there are arguments that they are even more constraining for small-medium

enterprises. The borrower should be able to put the cost of all financing on the same

basis, compare them and come up with the one that gives the lowest cost financing option.

Banks have often been criticized for having high-interest rates charged on loans. But

sometimes, there are factors beyond their control (Tirimba, et.al., 2014).

Access to information is a basic condition for providing loans to firms. Often the

problem of inadequate information is mentioned as one of the main aspects limiting bank

credit to SMEs. Problems faced by SMEs when attempting to raise finance is information

asymmetry in that they cannot prove the quality of their investment projects to the provider

of finance. This is compounded by the fact that new or recent start-ups businesses may

be unable to provide evidence of a good financial performance track record. SME owners

most often possess more information about the potential of their businesses but in some

situations, it can be difficult for owners to articulate and give detailed information about

the business as the financiers want. Additionally, some SME managers tend to be

restrictive when it comes to providing external financiers with detailed information about

the core of the business since they believe in one way or the other, that information about

their business may leak through to competitors (Tirimba, et.al., 2014).

 A risk factor is another aspect that explains the credit access by SMEs.

Commercial banks tend to impute a high risk to SMEs and are therefore reluctant to

extend credit to them. Due to their small size and inherent vulnerability to market

fluctuations, the mortality rates of SMEs are relatively high. The difficulties faced by SMEs

in accessing credit are attributed to their perceived higher risk profile. Lending institutions

regard SMEs as riskier enterprises for several reasons which include an uncertain

competitive environment, inadequate accounting systems, more unpredictable operating

environment, assets not properly registered, delayed payments for the products and

services rendered, and less equipped in terms of both human and financial resources

(Tirimba, et.al., 2014).

Conceptual Framework

This study aimed to analyze the credit access of small-medium enterprises in

Batangas City. The conceptual framework that was used in this study is the Input-

Process-Output model.

The input or independent variables indicate the respondent’s profile variables in

terms of age, level of education, nature of business, number of years in business, number

of employees, capitalization, and duration of using bank accounts. It also shows the

extent of challenges in credit access influenced by SMEs such as collateral requirements,

cost of credit, availability of information on finance, and business risks.

The process box shows the method that was used by the researchers in the study

which is the survey questionnaire. This instrument helped in obtaining specific information
 about the defined problem so that the data results in a better appreciation of the problem.

Through the data that was gathered and tabulated, the result was interpreted and treated

statistically.

From the result which formed the process, a proposed course of action to improve

and sustain the SMEs' credit access in Batangas City. For better understanding, the Input-

Process-Output model is shown in Figure 1.

INPUT PROCESS OUTPUT

Profile of respondents:
 Age
 Level of education
 Nature of business
 Number of years in
business
 Number of Survey Questionnaire Survey Questionnaire
employees
 Capitalization
 Duration of using
Data Analysis using Data Analysis using
bank accounts
statistical treatment statistical treatment
Extent of challenges in
credit access influence
by SMEs:
Interpretation of Data Interpretation of Data
 Collateral
requirements
 Cost of credit
 Availability of
information on
finance
 Business risks

Figure 1

Conceptual Paradigm
Hypothesis of the study

This research study is directed to test the research hypothesis:

Ho: There is no significant difference on the challenges in credit access when group

according to profile variables.

Scope and Limitation

This study was entitled “Credit Access of Small Medium Enterprise at Batangas

City”. The researchers first objective sought to determine the profile of the respondents

in terms of age, level of education, nature of business, years of business existence,

number of employees, start-up capital, and duration of using bank accounts. The second

objective was to determine the challenges in credit access influenced by small-medium

enterprises in terms of collateral requirements, cost of credit, availability of information on

finance, and business risks. The third objective was to compare if there's a significant

difference in the challenges in credit access when grouped according to profile. The last

objective was to determine what course of action may be proposed to improve the

measure of access to credit for SMEs.

The respondents of the study were fifty (50) business owners in Batangas City.

Specifically, they were the ones who had sufficient and appropriate understanding of the

subject, allowing the study to be more precise.

This study was limited to Batangas City, for this was the area where the

respondents will be taken. This study does not include other areas in Batangas Province
other than the aforementioned. Also, this study was limited only to the number of

respondents, as required, who own businesses that could meet the known classification

for small-medium enterprises. Additionally, the result of this study was limited only to the

data and information from the survey questionnaire that were distributed, as well as from

the literature that was cited and reviewed. The respondents of the study were the different

small and medium scale enterprises that have problems accessing credit. This research

also utilizes the descriptive method and data analysis using a statistical treatment for the

study to gather more reliable data and to come up with more precise conclusions that are

useful for the completion of this study.

Significance of the study

The study aims to determine and understand the credit access of small-medium

enterprises at Batangas City. The researchers believe that this study would be very

helpful to the following:

To the Small, Medium Enterprises in Batangas City. This study will provide

them with insights and familiarization about what challenges may face in credit access

based on the proposed study by the researchers.

To the SMEs Owners. This study will provide them with information to be aware

of the challenges they may encounter in accessing credit for the business.

To the Other Stakeholders. This study will provide a piece of information for them

in suggesting improvement in service delivery of the respective credit provide in Batangas

City.
 To the Financial Institutions. This study will assist them in developing solutions

that are specifically tailored to meet the financial demands of businesses.

To the Policy Makers. This study will enable the policymakers to come up with a

viable and focused entrepreneurship strategy that can help SMEs access credit.

To the Present researchers. This study will provide them with additional

information and knowledge about the challenges facing SMEs in credit access which will

serve as a guide in case they borrow money for their business.

To the Future Researchers. This study will provide them as a source of reference

material on their related topics and for the future researchers who undertake the same

topic in their studies.

Definition of Terms

To have a better understanding and clarity of the flow of thought in this research

study, the researchers have worked meticulously to define the following terms used in the

study that were defined both conceptually and operationally;

Small and Medium Enterprises. It refers to a business that maintains revenues,

assets or a number of employees below a certain threshold. Each country has its own

definition of what constitutes a small and medium-sized enterprise (SME). In the

Philippines is defined as any business activity or enterprise engaged in industry, agri-

business and/or services that has: (1) an asset size (less land) of up to PhP100 million;

and (2) an employment size with less than 200 employees.

 Credit. It is generally defined as an agreement between a lender and a borrower.

The ability of a customer to obtain goods or services before payment, based on the trust

that payment will be made in the future.

Finance. It is a term for matters regarding the management, creation, and study

of money and investments.

Collateral Requirement. It is a mean with respect to Loans an amount equal to

102% of the then current Market Value of Loaned Securities which are the subject of

Loans as of the close of trading on the preceding Business Day.

Cost of credit. It refers to the expenses charged to the borrower in a credit

agreement. This may include interest, commission, taxes, fees, and any other charges

issued by the lender.

Risks. It used to describe the uncertainty that a future event with a favorable

outcome will occur. In other words, risk is the probability that an investment will not

perform as expected and the investor will lose the money invested in the project.