Financing SME Essay Example for Free

Financing SME Essay The definition of Small Medium scale Enterprises (SMEs) varies from country to country. The classification can be based on the firm’s assets, number of employees, or annual turnover along with the loan amount. Central Bank of Sri Lanka defines SMEs as enterprises with less than Rs. 600 million turnover per annum and with a maximum exposure of Rs. 200 million mainly to be classified as a SME for Basel II Capital adequacy calculation and utilization of funds accumulated in the Investment Fund Account in Banks. Whatever the definition, and regardless of the size of the economy, the growth of SMEs throughout the region is crucial to growth of respective economies. Because, SMEs play a critical and important role in providing job opportunities, enhancing the quality of human resources, maximizing the use of local resources, saving foreign exchange, nurturing a culture of entrepreneurship, fostering creativity and opening up new business opportunities etc. Most corporate organizations in Sri Lanka or elsewhere are the establishments started as SMEs in its early stages. Classic examples from our own country may be Nawaloka Group, Access International, Softlogic Group of companies. In most literature, it is mentioned that access to financing has been recognized as a major impediment for many SMEs and its growth, whereas corporate business entities have the advantage over the SMEs in doing so primarily as a result of their formalization. However, according to Juliet Mckee and Kimball Dietrich (2003), most common problems for SMEs are the lack of access to market information and technology, the low quality of human resources and the lack of access to capital. Despite efforts by financial institutions and public-sector bodies to close funding gaps, SMEs continue to experience difficulty in obtaining risk capital. These funding gaps relate to firm size, risk, knowledge, and flexibility. The development literature focus a good deal of attention on issues faced by SMEs in accessing finance. Traditionally, the focus is on obstacles created by financial institutions, mainly by commercial banks or on imperfections in the broader institutional environment. However, SMEs also make decisions about financing and display attitudes that have an important bearing on financing decisions. Therefore, constraints may also appear on the â€Å"demand side† of the financing market. Objective of this article is to discuss the key challenges and issues for bankers pertaining to SME lending, of which, part of them are inherent in SMEs and for others bankers are responsible. 1. Issues of SMEs 1. 1 Lack of financial literacy or weak financial literacy In the literature, lack of financial literacy is designated as informational asymmetries where SMEs typically posses privileged information on their business that cannot be easily accessed or cannot be accessed at all by lenders or outsiders. Reasons for this may vary and also have different perspectives. SMEs are mainly driven by entrepreneurs who have nurtured in their own ways to prospective SMEs. As a result of hard ways of development, they either had no time to devote further education or do not believe in learning. This is evident from the credit applications that are submitted to banks for financing. This eventually leads to low levels of financial literacy among entrepreneurs. Financial literacy is the ability to understand how money works in the world: how someone manages to earn or make it, how that person manages it, how he/she invests it (turn it into more) and how that person donates it to help others. More specifically, it refers to the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resource. Though many SME owners are sound in developing business models and working out the profitability of products and services, understanding about the macro picture of the SME’s overall financial standing in terms of profit and loss account, balance sheet and cash flows is week. As a result, they sometimes opt to resort to outsiders or merely depend on themselves in preparation of financial information which may or may not reflect the actual picture of the SMEs. Because of this impediment, banks have no choice, but to depend on collateral for SME financing. At the backdrop cash flow lending is encouraged, financial institutions are struggling to project the SMEs’ sustainable bankability. This is recognized as the main obstacle for banks and financial institutions in financing SMEs. One of the options to counter this impediment is the concept of â€Å"Para accountant†. A Para accountant is an external consultant who uses finance, economics, risk management and technology skills to help organizations prepare and report financial and tax statements according to accounting principles and regulatory requirements. A Para accountant also may review a firms internal controls, processes and procedures to ensure that such controls are adequate. A Para accountant may work on a clients site or remotely. They are not necessarily qualified accountants, however, might be an option. Bankers’ prime objective in this endeavor is to develop reliable sources of information so that they could project the sustainable cash flows of the business. With this objective banks could train their credit appraisal officers as Para Accountants, who will interacts with prospective SMEs and develop a set of financial information while strengthening the banking relationship over a period of time. 1. 2 Entrepreneurs’ knowledge about building a prospective banking relationship A banking relationship is about much more than just selecting a bank to handle a company’s bank accounts. If the relationship is managed well, it can help a company to thrive. SMEs that use more than one bank will need to manage multiple banking relationships. A company will first have a business account (or several) at a retail bank (or banks) for all day-to-day financial transactions. Whether it is retail, SME or corporate, the banks should have a team of business banking advisers on hand, to advise and guide a company. It’s important to ensure continuity— banks usually offer a contact with a designated person and in turn expect to deal with the same person or persons from the company. A good banking relationship depends not only on personal rapport, but also by having a solid understanding of the company and its financial needs. Over time, a banking adviser should build up a good understanding of the company’s preferred ways of doing business and incorporate that into how their banking requirements are handled. There are many advantages having a sound banking relationship for SMEs. The bank is more likely to offer loans and other lines of credit, potentially at preferential rates of interest, if the bank advisers feel there is a good relationship with the company. The bank’s advice can be tailored for the company’s needs and personal style, rather than given generically. In times of crisis, a company having its bank’s support will be crucial. Even if a company is a text-book case of insolvency, strong personal rapport with a company representative means that the bank is more likely to offer leeway if it knows that directors are doing their utmost to keep the company going. Failure to develop a strong relationship, however, means that the SME is likely to miss out on good advice and, crucially, support in times of difficulty. However, unfortunately, many SMEs are not on the right track to understand the importance of having a good banking relationship. Given that no sound financial information are available, at least, SMEs should try to maintain a healthy customer relationship with the financial institution to entice financial needs, especially in difficult periods. It is both Bankers’ and SMEs’ responsibility of developing a prospective banking relationship over a period of time without compromising risk capital. More than the credit facilities, credit plus would be reasonably appropriate to start such a relationship and then move into advanced levels of relationships along with credit facilities. 1. 3 Financial discipline of entrepreneurs As Henry Ford correctly cited, â€Å"Wealth does not come accidently. You have to plan for it. † One’s discipline explains the right behavior and ability to take decisions without emotions. Hence, financial discipline is all about right financial decisions. In order to be financially discipline one should understand concepts of accounting and financial management in SME business. Accounting in general is all about record keeping and developing summary financial reports. Most commonly available financial reports or information are the profit and loss account, balance sheet and the cash flow statement. Unless SMEs keep records of their daily activities, it is difficult to develop financial statements with regard to their businesses. With no financial statements, SMEs will always struggle in making financial decisions. More often, there is no clear distinction between the business finance and the finances of the proprietor. Therefore, it is critical that the lender examines carefully borrower’s all commitments, i. e. , those related directly to the business and those associated with the proprietor’s private life and assets. Lack of Business Planning is a result of weak financial indiscipline in SMEs where investment decisions, working capital decisions, even pricing decisions are based on the entrepreneurs’ values than on facts. The lack of proper financial discipline results in incorrect business decisions, which hampers the sustainability of the SMEs. MacRobert (2002), in his SME manual explains why SME borrowers are different to commercial and corporate borrowers. One of the common reasons is unskilled/ untrained principals. Many SME principals in the Asia-Pacific region are self-starters, often with limited formal education, and minimal training in business management skills. That is not to say that they are incompetent, but that they often lack the capacity to research information on ways to strengthen their businesses, and, indeed, to be aware that such resources even exists. Role of the bankers in this regard is to educate the importance of financial discipline through strong banking relationships. Bankers are one of the key sources, to get SMEs to believe in financial discipline. Bank officers should take the initiatives in this endeavor to educate the SME owners. Role of the Government is also a key imperative in developing required conducive environment through institutional and policy frameworks. Some universities in Sri Lanka have already started dedicated departments to teach courses related entrepreneurship. (Example: University of Sri Jayewardenepura and University of Colombo) and It is important to note that Business studies is part of the GCE A/L curriculum. Recent budget proposals in 2011, 2012 and 2013 has given enough support to encourage SMEs and SME financing and one of the very useful proposals was to direct government banks to set up dedicated SME Branches not only to facilitate SMEs with easy access to finance, but also to educate SME owners and to guide and direct them to right places and people. However, strengthening the institutional framework to develop business development support services is also an imperative. 2. Issues with Banks SMEs are not only critical to the economy, but also to the banks’ profitability. Most diversified banks maintain a substantial percentage of exposure to the SMEs as a strategic investment given the diversity within the SME portfolio itself. It is always profitable, but need to properly evaluate and closely monitor the delinquencies to avoid any credit risks. It is a perception as well as a fact sometimes, that SMEs are always highly risky as explained by many banks. It may be due to several factors including, non availability of financial information, no tax returns, no collateral, one man show, highly sensitive to economic conditions, no proper organizational structure, and many more. These are reasons given to avoid or very conservative underwriting of SME credit proposals. As a result of these reasons, credit policies of financial institutions are based on stringent credit guidelines. 2. Institutional framework with hindering process issues In the case of many developing countries, the above mentioned obstacles to SME financing are exacerbated by institutional and process factors. Most developing countries are still highly concentrated and have uncompetitive banking sectors. This reinforces the tendency to adopt conservative lending policies. Credit policies which mainly cover the credit risk and market risk, endorse a processes which covers many elements to secure exposure, while satisfying the regulator’s requirements. This eventually results in a value driven Credit culture in financial institutions. According to MacDonald and Timothy (2006), management’s credit policy determines how much risk the bank will take and in what form. A bank’s credit culture refers to the fundamental principles that drive lending activity and how management analyzes risk. There can be large differences in their lending philosophy. The three potentially different credit cultures are: values driven, current profit driven, and market share driven. The institutional framework is reflected through the credit policy in this part of the world, the tendency is to inculcate a value driven credit culture, which has the following attributes: Focus is on credit quality with strong risk management systems and controls Primary emphasis is on bank’s soundness and stability and a consistent market presence Underwriting is conservative and significant loan concentrations are not allowed. Typical outcome is lower current profits from loans with fewer loan losses It is evident with lower non- performing ratios prevailing in banks justifies that credit risk is covered with loan risk mitigation factors and discourage granting venture capital to SMEs. Eventually, SMEs need to resort to acceptable securities which hinders them from easy access to finance from financial institutions. 2. 2 Collateral syndrome (Risk avert) Strong value driven credit cultures in financial institutions always tighten the belts in covering credit risk. Unless the financial institutions develop competencies in cash flow based lending, credit officers have no choice but to cover themselves with collateral in risky SME lending. Competencies itself will not drive the business unless the risky lending is rewarded with challenging business targets. Security based lending propositions are gradually becoming unhealthy for economies as it discourages strategically important investment decisions. Government of Sri Lanka recently enacted legislations to ease the pressure on SMEs through amendment of Parate execution where normal civil procedure of debt recovery should be applied for loans below Rs. five million with security of property mortgages. 2. 3 Weak competency in building cash flow based lending propositions Strong value based credit policies encourage security oriented lending and creates knowledge gaps in credit officers. Security oriented lending does not require strict cash flow projections and credit evaluations. Developing cash flow projections is an art and requires overall knowledge about the industry, technology, external factors (external climate) and specific firms (internal climate) along with econometrics modeling to analyze the cash flows. When it comes to large projects, knowledge in project appraisals and risk analysis will help the credit officers to get exposed to project financing. At the backdrop of investor confidence and developing businesses in emerging economies, venturing into risky business propositions is in the agenda of the banking and financial intuitions. Financing SMEs are risky but at the same time profitable, so indeed banks need to develop how best they could mitigate the risk of these ventures. One of the options is to gradually develop a culture of SME financing with confidence through development of competencies in their credit officers. Competency development not only addresses econometric techniques of analyzing and evaluating the credit proposals, but also industry knowledge and exposure, experiences of sick industries and business units, world politics and world economics, knowledge in emerging markets and technologies, behaviors and issues of labor, understanding the entrepreneurship etc. Conclusion Many of the literature examine the issues of financing SMEs world over. However, there are key issues not only from the SMEs point of view, but also from the financial institutions and, government’s point of views. No one can expect the SMEs to nurture in best practices all by themselves. In this regard, the role of financial intuitions is greater, when it comes to inculcate and nurture SMEs in the right directions. The issues for SME financing discussed above are the keys, but there are many others which needs further discussions.

Philosophy of Teaching Essay -- Teachers Education Learning Essays

Philosophy of Teaching My goals as a teacher are to help students communicate effectively and foster a desire to learn. I believe these two characteristics are important for students to have because despite what problems they encounter or what situation they are in, the ability to communicate effectively will help them in working with others and the desire to learn will motivate them to make positive changes in their life. As a teacher, I want my students to become interested in learning, both in school and in their personal lives. With these two goals in mind, my role as a teacher is to help them acquire these skills and values. However, effective communication is one of the hardest tasks for teachers because we all communicate in different ways and through different means. This is why teachers also need the desire to learn because it will motivate them to learn more useful ways of communicating and connecting with the students. To help students attain these goals, a teacher who leads by example can demonstrate to students how to communicate to others. In addition, if teachers are excited about what they teach, they will create a better learning environment that will motivate the students to learn. My philosophy of teaching consists of these two traits because after they leave my class, I want them to continue their education with the desire to learn more and to communicate this desire and the skills they have obtained with others. As a future social studies ... Philosophy of Teaching Essay -- Teachers Education Learning Essays Philosophy of Teaching My goals as a teacher are to help students communicate effectively and foster a desire to learn. I believe these two characteristics are important for students to have because despite what problems they encounter or what situation they are in, the ability to communicate effectively will help them in working with others and the desire to learn will motivate them to make positive changes in their life. As a teacher, I want my students to become interested in learning, both in school and in their personal lives. With these two goals in mind, my role as a teacher is to help them acquire these skills and values. However, effective communication is one of the hardest tasks for teachers because we all communicate in different ways and through different means. This is why teachers also need the desire to learn because it will motivate them to learn more useful ways of communicating and connecting with the students. To help students attain these goals, a teacher who leads by example can demonstrate to students how to communicate to others. In addition, if teachers are excited about what they teach, they will create a better learning environment that will motivate the students to learn. My philosophy of teaching consists of these two traits because after they leave my class, I want them to continue their education with the desire to learn more and to communicate this desire and the skills they have obtained with others. As a future social studies ...

Romeo and Juliet Are Failed by Their Parental Figures, Discuss

Within the story of Romeo and Juliet the parental figures with responsibility over the children are not just the biological parents, however in the time when the play was written, this would have been normal for the rich, upper class families that the Montague’s and Capulet’s were. The parental figures over the two children change as their relationship between the two lovers develops and other events occur within their family lives.Juliet is the main focus of the changing in parental figures and this may be down to the failing of her by her nurse, at the start of the play the nurse is a vital role in her life, and Shakespeare shows this though Juliet confiding in the nurse. However, this is how the change occurs as we see Juliet feeling as she has been failed by nurse in these secretive chats. However Romeo remains with one strong figure in his life thought the play, Friar Lawrence, and although the outcomes of dramatic events this appears to remain the same thought out .Juliet and nurse have a strong bond at the beginning of the play, due to the relationship nurse agrees to help Juliet marry Romeo as nurse feels it is what Juliet really wants. However when lady Capulet wants Juliet to marry another man, late on in the play, the nurse advices Juliet to forget about Romeo and this is where the main start of Juliet feeling failed occurs.Juliet confides in her nurse for advice about Paris’ marriage proposal, but the trust between them breaks down when nurse says ‘I think you are happy in this second match, for it excels your first’ Juliet is angry at nurse for saying this as she wants the nurse to help her continue her love for Romeo. Feeling failed by Nurses lack of help she decides to go to Friar Lawrence for help, breaking her relationship with nurse.In this situation the Nurse may not have failed Juliet, as she only did what she thought was best for her, however through Juliet’s eyes, the nurse failed her by helping her with Romeo at the start but stopping when the situation developed. Juliet also feels let down by her father as he forces her to marry Paris even though she begs not to, and when she says ‘he shall not make me there a joyful bride’ meaning she will not marry Paris, he reacts angrily saying ‘Or I will drag thee on a hurdle thither. accusing her of treason for not wanting to do as her father commands of her. He thinks she should be proud and thankful that he has found her such a worthy husband. He is more concerned with her status, and that of his own, than he is her happiness. Juliet knows that she will get no help from her father in following her heart so she feels forced in to taking the desperate measure of faking her own death. Juliet is clearly let down by her father who should have listened to her and valued her happiness more.Romoe’s parents echo the relationship in the Capulet household between them and their children, as again their relationship is a distant one. So much so that Montague and Lady Montague don’t know what is wrong with Romeo when he is in depression over his unreturned love for Rosaline. However although they aren’t close to Romeo, he isn’t failed by his parents as there are still there for him ‘Could we but learn from whence his sorrows grow, we would as willingly to give cure as know. This is said by Montugue when he is asking Benvolio if he knows what is wrong with Romeo meaning he will put right what is wrong with Romeo if he knows what it is. So Friar Lawrence is a main parental figure though the play for Romeo throughout and for Juliet after her relationship with her nurse breaks down. Friar Lawrence really tries to help the couple. He marries them and helps Juliet develop a plan so that Romeo and Juliet can finally be together.He sends the ill fated message that never gets to Romeo and it is no failing of his that it does not reach him in time. However, despite all of his good i ntentions at the last he does fail Juliet, if he had not run away from the guards he may have been able to convince Juiet not to kill herself when she awakes from her drug induced death and finds Romeo dead beside her.In conclusion, Romeo and Juliet are let down by the parental figures in their lives. From the distant parents who care little for their happiness to the Friar and nurse who despite their love and devotion to the young people are ultimately not there for them when they need them most. Had the parental figures done a better job in supporting this young couple perhaps Romeo and Juliet would not be such a tragic love story.

Choosing A Career At Young Age - 743 Words

â€Å"Imagination is everything. It is the preview of life ´s coming attractions. (Albert Einstein)† Choosing a career at young age expands the imagination in one ´s mind. At the age of five, my imagination was expanding because that was all I thought about. Growing up to me meant there would be plenty of responsibilities that would have to be taken care of. This is something that our parents teach us while growing up. What is more important of those teachings is the significance. If you can pursue any career path, then do it without the ideas of others. This is what I did. The actions of others affect your thoughts. My elementary and middle school years changed my perspective of how my life would be while growing up. I experienced bullying and behaviors that left me surprised. There were careless teachers, rude comments of how I would grow up to be, and the words, â€Å"You will never be good enough† unspoken, but still meant. I would just think this was normal, b ut it would continue for years. Then bad things turn for the good. I was given the opportunity to start over by going to a new school. There I was exposed to the career of Criminal Justice. This is where I had my mind set. The past years of bullying affected my way of making decisions. I felt like I had to run my decisions through somebody. That somebody were my parents. Each one of our parents dream of their child ´s future, so I was hoping we both had the same thoughts. After being at my new school for one year, IShow MoreRelatedChallenges Students Face When Choosing A Career Essay1182 Words   |  5 PagesFace when Choosing a Career Today, choosing a career can be problematic especially within the new graduates, and the choice of career path is not always in our hands. 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