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SME FINANCING

Table of Contents

SME Financing:- ................................................................................................................ 2

History of SMEs:- .............................................................................................................. 2
Importance of SME Financing:- ......................................................................................... 2
Role of SMEs in Pakistan:-................................................................................................. 3
The Management of Business:- ......................................................................................... 3
Ten Steps for SME Banking Success:-................................................................................. 4
SME strategies for success:- .............................................................................................. 5
Strategies To Build Competitive Strength:- ........................................................................ 5
Applying technology:- ................................................................................................... 5
Agility:- ......................................................................................................................... 6
Accelerated Innovation:- ............................................................................................... 7
Attracting and Retaining Talent:-................................................................................... 8
SME Strategies For Growth:- ............................................................................................. 9
Strategies To Expand Revenues:- ...................................................................................... 9
Successful SME Strategies Drive Improved Financial Performance:- ................................. 10
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SME FINANCING

SME FINANCING

SME Financing:-
SME finance is the funding of small and medium-sized enterprises, and represents a
major function of the general business finance market – in which capital for different types
of firms are supplied, acquired, and coasted or priced. Capital is supplied through the
business finance market in the form of bank loans and overdrafts; leasing and hire-purchase
arrangements; equity/corporate bond issues; venture capital or private equity; asset-based
finance such as factoring and invoice discounting,[1] and government funding in the form of
grants or loans.

However, not all business finance is external/commercially supplied through the

market. Much finance is internally generated by businesses out of their own earnings and/or
supplied informally as trade credit, that is, delays in paying for purchases of goods and
services.

History of SMEs:-
 Small business was discovered about more than 4000 years ago.
 HAMMURABI, the king of Babylon introduced the first 300 business laws.
 These laws known as Code of HAMMURABI.
 The time when the SMEs was discovered on 28th October 1998 4:10 PM.

Importance of SME Financing:-

The economic and banking importance of the small and medium enterprise (SME)
sector is well recognized in academic and policy literature. It is also acknowledged that
these actors in the economy may be under-served, especially in terms of finance. This has
led to significant debate on the best methods to serve this sector.

Although there have been numerous schemes and programs in

different economic environments, there are a number of distinctive recurring approaches to
SME finance:-

 Collateral based lending offered by traditional banks and finance companies is

usually made up of a combination of asset-based finance, contribution based
finance, and factoring based finance, using reliable debtors or contracts.
 Information based lending usually incorporates financial statement lending, credit
scoring, and relationship lending.
 Viability based financing is especially associated with venture capital.
 Reliable for all the small ticket loan
 The entity type not depending on the value of the business.
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SME FINANCING
Role of SMEs in Pakistan:-
Pakistan has emerged as the second rapidly growing economy in Asia after China.
Even though the large scale manufacturing registered 15.4% growth but small and medium
enterprises (SMEs) is the core issue in the country’s progress and especially for the
prosperity of masses that are surviving with low scale income due to which Pakistan ranks
135th out of 174 countries oh Human Development Index. The assessment of the role of
SMEs in Pakistan is of vital importance. SME produces the income stream for masses located
in the countryside and the capitalists associated with this activity that is generally medium
or small as the name suggests. SMEs will be the main source of poverty reduction in
Pakistan that will create the value and innovation for the country in the days to come. The
thing that really needs serious attention is to remove the unnecessary bureaucratic
procedures.

The Management of Business:-

The effective management of lending to SMEs can contribute significantly to the
overall growth and profitability of banks. There has been considerable research and analysis
into the methods by which banks assess and monitor business loans, manage business
financing risks, and price their products and how these methods might be further developed
and improved.

There has been particularly intensive scrutiny of the kinds of business financial
information that banks use in making lending decisions, and how reliable that information
actually is.

Banks have traditionally relied on a combination of documentary sources of

information, interviews and visits, and the personal knowledge and expertise of managers in
assessing and monitoring business loans. However, when assessing comparatively small and
straightforward business credit applications, banks may largely rely on standardized credit
scoring techniques (quantifying such things as the characteristics, assets, and cash flows of
businesses/owners). Using such techniques and also centralizing or rationalizing business
banking operations generally can significantly reduce processing costs. Standardized
computer-based assessment may also be more accurate and fairer than reliance on the
personal judgments of local bank managers. As a result, banks may now be able to offer
more loans, faster and in larger amounts, and reduce previously high security requirements.

However, business lending as a whole is substantially more diverse and complex

than personal and residential mortgage lending. This, coupled with the large size and
inherently risky nature of many business loans, tend to limit the scope and desirability of
computerized credit scoring in assessment and monitoring.

Scottish Government makes available funding for small and medium sized
enterprises in order to help them reduce resource usage (in particular energy) and lessen
carbon impacts. The Scottish Government SME Loan Fund is unsecured and interest free
(loans for renewable technologies are charged at 5% due to the Renewable Heat Incentive.
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SME FINANCING
Ten Steps for SME Banking Success:-
Success with SMEs continues to elude many banks. Instead, they find sustainable
profitability difficult to achieve and are experiencing small but increasing inroads into their
customer base by alternative finance companies.

Bank management should consider a ten-question checklist to sharpen

their strategic focus and ensure a long-term competitive advantage with this critical
customer group.

1. How does your bank describe Small Business and why?

Each bank defines small business differently, usually based on customer revenues.
Companies with less than $1mm revenues need to be sold to and serviced very differently
than larger businesses. Banks need to decide their strengths and the types of companies
they should focus on…and avoid. Banks cannot be all things to all companies.

2. Where does Small Business report?

Better results will likely result from reporting into the retail group versus the
commercial bank group that should remain targeted on larger loans.

3. What level of priority does the small business segment have within the bank versus
other segments?

Banks say they are “small business friendly,” but the reality is often different. How
difficult is it for a small business to bank with you? How difficult is it for a small business to
be a vendor to the bank? The reality may be far from the self-image.

4. What is the quality of your Business bankers and Managers?

Small business cannot be a way station or dumping ground for bankers. It needs to
be a career position for a bank to establish itself in this area. The best small business banks
encourage bankers to remain in this area and provide them with the prestige and
compensation to do so.

5. What percentage of time do bankers spend on sales versus administrative

activities?

Bankers who should be spending most of their time with customers; instead, too
often they remain behind their desks doing paperwork and filling out forms.

6. From the client’s perspective how do you differentiate your products, services, and
delivery model?

How would your customers describe your value to them?

7. How effectively does the bank sell to the entire household versus the business
only?

Banks tend to be silo-oriented. Generating strong profits from small businesses

requires banks to capture as much of the business and personal wallet share as possible,
including personal loans and investments.
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SME FINANCING
8. Is your smaller loan credit process streamlined?

Many banks follow a similar process for a $100k loan as for a $1million loan. That
leads to smaller loans losing money for the bank and creates too many hurdles for a small
business to jump through.

9. Have you evaluated working with vendors and third-part lenders to reach more
customers and improve the customer experience?

Alternative finance companies can provide the technology and processes required to
allow for profitable small business lending while the bank keeps control over the customer
relationship. Many are anxious to partner with banks rather than compete.

10. Does compensation encourage a strong sales effort?

While banks need to avoid the conflicts highlighted in the recent Wells Fargo
incident, banks need to sell more to each business customer based upon an understanding
of that customer’s needs and current product use.

SMEs represent 95% of the world’s companies. Banks cannot afford to lose that
franchise and, therefore, they need to refine their current SME approach.

SME strategies for success:-

SMEs are responding to uncertainty by developing effective strategies that build
their competitive strengths. They are also developing strategies to build from this strength
and expand into new domestic and export markets.

Strategies To Build Competitive Strength:-

SMEs are prioritizing four areas critical for future success:

 Applying technology
 Agility
 Accelerated innovation
 Attracting and retaining talent

While large firms also focus on these strategies, SMEs possess distinct advantages in
each of these areas, which they can exploit to strengthen their market position. For this
reason, we describe them as the Four Aces for SMEs. SMEs are already confident in their
capabilities in these four areas, and plan further improvement in the next three years.
Indeed, making investments to build these forward-looking capabilities is considered a
higher priority than managing day-to-day operations

Applying technology:-

Effective use of technology is increasingly important for SMEs, as more and more
industries digitize. According to Dr. Mariano Mayer, Secretary for SMEs and
Entrepreneurship, Argentina, “In a knowledge economy, an SME that does not embrace
technology and the digital agenda will have serious problems.”
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SME FINANCING
The good news is that technology is becoming rapidly more affordable. Cloud-based
technologies allow SMEs to invest incrementally in IT without the huge investment and risk
of an in-house IT department. SMEs can also use partners to access leading technologies. As
Adam Smith, Director of Partnerships at Kakaxi, an agro-tech startup, says, “As a start-up it’s
impossible to do everything, which is why partnerships and collaborations are so necessary.
For example, we are not looking to develop our own image recognition technology, but
partner with organizations where there is overlay in objectives.”

Information is also becoming a commodity, more widely available through open

application programming interfaces (APIs). Simone Lini, CEO of Waynaut, an Italian start-up
in the B2B transportation sector, identifies this as an opportunity to add value, because data
from different sources can be smartly integrated to enable multi-modal transport
solutions—to book a multi-step journey with one click. “In a few years we will get wide
access to a huge number of APIs from pretty much all the most important providers,” he
says.

SMEs are deploying technology across their businesses to drive new sales and
improve efficiency. Improving the reliability of communications is the highest priority for
SMEs. Other investment priorities include developing customer-facing mobile apps and
technologies to analyze customer data. Technology to improve decision making, including
data analytics, enterprise systems, and workforce productivity is a priority of SMEs.
Technology more likely to improve operational efficiency, like the Internet of Things (IoT),
process automation, and robotics, is a priority for just over half of SMEs.

Agility:-

In a period of rapid disruption, where customers are increasingly demanding new,

bespoke products and services delivered nearly instantly, companies must adjust course and
scale operations quickly. Large incumbents with outdated, complex IT systems, established
bureaucracies and standardized regimes for managing planning, budgeting, and
performance management naturally find it difficult to change course on the fly.

SMEs have a built-in agility advantage, so it’s no surprise that many recognize it as
their top priority for investment. According to the study, SMEs are streamlining processes,
with two-thirds introducing lean and agile techniques, virtual teams, and using information
to enhance and accelerate decision-making.

With the growth of online platforms, virtual networks, and communities of interest,
it is also increasingly easy to work collaboratively with others. New flexible workspaces are
becoming popular in many cities, where start-ups and SMEs can work in close proximity.
Sixty-five per cent of SMEs see networks of partners as important to help them scale
operations.

Many large companies seek partnerships with smaller SMEs to build more agility into
their own operations. As Adam Smith, Director of Partnerships at Kakaxi, explains, “Small
companies are able to be more flexible, and many larger companies—say, conglomerates in
food or transportation—are trying to pivot their models. It’s a really positive thing right now
for SMEs, as it leads to more partnerships and funding opportunities.”
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SME FINANCING
Accelerated Innovation:-

Speed to market with distinctive new products and services can be a critical
advantage for SMEs. “If you don’t innovate, you are dead,” says Dr. Mariano Mayer, the
Argentine secretary for SMEs and Entrepreneurship. “And it’s very difficult for big
companies to innovate—it’s another opportunity for SMEs.”

Moreover, technology is disrupting the very process of innovation. Today invention

is less dependent on huge capital investments and more dependent on talent and
flexibility—to the benefit of SMEs. Increasingly, innovation can be achieved through
software design, which is dependent on smaller teams of software engineers, often using
agile development techniques, cloud services and a flexible, supportive corporate culture,
which can be easier for SMEs to provide. “Technology democratizes innovation,” says
Professor Iandoli. Whereas Peta Jurd, Chief Commercial Officer of Simavita, an Australian
healthcare products start-up, notes, “There’s an advantage in having the development team
working in the one location with the clinical team in that the team can be put together in
one room, so they stay connected, with the same information, and can make changes to the
product development in real time.”

The growing trend for open approaches to innovation works to advantage SMEs. As
universities become increasingly important components of the innovation ecosystem, the
more proactive, business-focused institutions are developing relationships with businesses
and venture investors. Likewise, in their search for innovation, large companies are seeking
to invest and partner with SMEs that can be more agile, experimental, and risk-tolerant.
Such collaborative approaches make innovation affordable for SMEs, as costs are shared
among partners. It’s also proving very effective. As Tom Thackray of the UK’s CBI explains,
“It’s exciting because you see innovators building on each other’s ideas, and it grows
exponentially.”

Many SMEs (59%) are using customer feedback to nurture product development.
More than half are co-creating with customers. For example, Envision TEC, a US based 3D
manufacturer, describes how their customers regularly come to them with new ideas, new
opportunities to convert analogue processes to digital. “Every day we get, ‘can we do this?’”
says COO, John Hartner.

Creating an innovative culture across the organization is critical; 61% of SMEs in our
survey encourage all staff to contribute to innovation. Other techniques include recruiting
high-caliber innovators or making a team responsible for driving innovation. Web Radar, a
Brazilian data analytics provider to mobile operators, logistics companies and governments,
has more than 50 staff focused on research and development out of their total headcount of
82. “We have a team focused on innovating, on incubating new products using the market
as inputs and working with academic institutions in Brazil and overseas, and also with
investors,” explains Commercial Director, Marcelo Schiaffino. “The market demands more
and more creativity, innovation and flexibility. It’s hard to promote off-the-shelf solutions
nowadays.”
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SME FINANCING
Attracting and Retaining Talent:-

SMEs need to attract top talent to boost their competitiveness. This can be difficult,
as graduates from top business schools and universities are often attracted to high-paying
careers in finance or in larger corporations. Attitudes, though, may be changing.
Entrepreneurship is becoming cool. As Tom Thackray remarks, “It’s a generational shift.
People are looking for different things.”

SMEs can design attractive alternatives to life in the big corporation. In addition to
offering early responsibility and the potential for rapid career advancement, fast-growing
SMEs can offer flexible work arrangements, attractive stock options and other perquisites
for creative spirits that large firms can’t. Some SMEs offer an empowering vision or values
that appeal to their employees and help build commitment to a cause, that a large
corporate may find much harder. For example:

 Simavita, the healthcare start-up, develops products that provide caregivers an

evidence based care plan to manage incontinence, a problem affecting 400 million
people worldwide. The positive impact of the projects helps them attract talented
software developers. “Part of what motivates them is the opportunity to make a
really big difference in an area that can help a lot of people,” says Peta Jurd.
 Web Radar also uses the technical challenges it faces to attract highly qualified
technical staff. New innovations include extracting data from taxis in Brazil to get up-
to-date information on mobile network coverage in major cities. “Web Radar
presents a very interesting challenge for tech-savvy employees,” says Marcelo
Schiaffino, “And to present Web Radar as an exciting company, it’s enough to tell
them our story.” They can also offer the prospect of exciting times ahead, as they are
expanding into new sectors and internationally.
 ALICE is a software company that has built an operations platform for the hospitality
industry. It started four years ago in the US. According to founder and company
President Alex Shashou, ALICE concentrates above all on building a rigorous hiring
process. “We’re a people company,” says Alex Shashou. “Every company today is.
We’ve read good process books, focused our culture to ensure information flows
through the company, and have paid for the right tools.” The firm developed a very
complex code base, so its design and development teams need at least five years’
post-college experience. The company has set up a design team in Brazil and a
development team in Eastern Europe, many hired from the Russian equivalent of
MIT.

While SMEs identify good salaries as the most important factor in attracting skills
and talent (63% of SMEs), qualitative aspects, like providing an attractive working
environment, a supportive and inclusive culture, and providing training and development
opportunities, follow close behind. The latter was identified as important by more than 60%
in our survey. At Web Radar, for example, a focus on culture is used to integrate staff. Music
and philosophy classes help nurture creativity, and a running team helps build teamwork.
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SME Strategies For Growth:-
Employing their Four Aces- Applying technology, Agility, Accelerating innovation and
acquiring top talent—SMEs can position themselves to deliver sustained financial
performance and compete successfully against larger or more-established firms.

To expand sales, for example, many SMEs target specific niche markets where they
offer distinct advantages and can avoid having to compete solely on cost against larger
enterprises with greater economies of scale. “If SMEs can identify a specific niche and
deliver high-quality products, they can thrive on small volumes with high margins,” says
Professor Iandoli.

Web Radar, for example, knows its market extremely well, as the founder was an
experienced executive at a large mobile operator. “A good strategy for an SME is to excel in
one industry vertical,” says Commercial Director, Marcelo Schiaffino. “We are doing that by
building a very strong and robust infrastructure and then getting more specialised in a
specific niche. That’s the only way to fight the IBMs and HPs.”

Having successfully established itself in a particular niche, an SME can use that
foundation as a base for expanding into adjacent sectors, or other geographies, either
through organic growth or by acquisition. This step-by-step approach, builds from core
strengths, and responds flexibly to new opportunities allowing a company to adjust as
needed in uncertain times (see the ALICE case study below). “Some SMEs fall down by trying
to run before they can walk,” says the CBI’s Tom Thackeray. “Sometimes it’s better to make
it in one market, and from there you can build it up.”

For example, Envision TEC, the 3D manufacturer, started out in jewelry and then
moved into other sectors, including healthcare. It recently acquired an innovative start-up
to enter the oil and gas, automotive, and aerospace markets. “We look for opportunities for
our differentiated technology that will have high-value applications and can scale,” says
COO, John Hartner.

Strategies To Expand Revenues:-

SMEs express ambitious plans to expand their revenues over the next three years in
both domestic and international markets. They are also forecasting improved profitability,
with improvements in operating efficiency.

To accomplish this, many are turning to exports as a focus for growth. Respondents
expect exports as a share of total sales to grow from 22% to 31% over the next three years.
To boost export sales, SMEs are investing in digital platforms, developing marketing
intelligence in overseas markets, and partnering with established multinationals. To a lesser
extent, SMEs are also setting up local branches and working with local agents to expand
internationally, though these can require significant investment and local knowledge.
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Successful SME Strategies Drive Improved Financial Performance:-
Generally, SMEs express optimism about their business prospects, and project their
revenue growth will increase from 5% next year to 6% over the next three years. Profit
margins are forecast to grow from 3.8% to 6.3% over the same period.

However, SMEs that rate themselves highly on the Four Aces and have developed
effective strategies3 are forecasting even stronger financial performance, with net profit
margins growing to 9% per year within three years’ time, more than 50% higher than the
rest of the population. This group of confident SMEs is found in all countries and sectors,
though there is a slightly higher share among older, more established companies and in
sectors that have already been subject to disruption, such as telecoms. They are far more
likely to identify business opportunities arising from disruption.

In addition, they:

 Rate economic uncertainty as a greater threat, yet have more confidence in the
global and local economic outlook.
 Are much more positive about technology and significantly more likely (69% vs 40%)
to see themselves as a disruptor rather than someone to be disrupted.
 See intensifying of competition in their industry but more opportunities as barriers
to entry come down.
 Are more willing to take big risks to gain big rewards (85% vs 51%).
 Are more concerned with getting access to finance to support their growth plans
(93% highlight cash flow as important vs 63% other SMEs).
 Are far more at ease with business regulation and working with government (79%
say regulations are easy to navigate, compared with 40% of other SMEs).