The Discussion of the Small and Medium-sized Enterprises

ORIENT ACADEMIC FORUM
The Discussion of the Small and Medium-sized Enterprises
Financing Problems in Hebei Province
LI Xiaodong1, ZHANG Ming2
1. The second year student of master majoring in Industrial Economics ,College of Economics and Trade,
Agricultural University of Hebei, P.R.China, 071001
2. Accountants working in Finance Department, Agricultural University of Hebei, P.R.China, 071001
Abstract: The small and medium-sized enterprises (SMEs) plays a very important role in promoting
economic development in Hebei province , but financing straits have caused a majority of the main
problems to SMEs. The article bases the analysis on the financing difficulties of SMEs in Hebei
province, from three aspects: the enterprise itself, government policies and institutional environment,
financial institutions to explore the deep reasons, and it also puts forward the corresponding
countermeasures.
Keywords: small and medium-sized enterprises (SMEs), financial difficulties, financial institutions
Since the reform and opening up period, the SMEs have a rapid development in Hebei province. The
number of private economy units is 1.914 million, and the number of employees is 14.37 million in
2007, which realizes the value-added outcomes 743.7 billion yuan ,and it takes up the 53.6% of GDP in
Hebei province, and costs the tax 75.79 billion yuan, and accounts up total revenue of 55.1%. The SMEs
play a increasingly important role in promoting the economic growth in the economic and social
development, and have become the main forces of stimulating the economic growth, expanding
employment, advancing rural market prosperity, increasing the fiscal revenue , constructing a new
socialist countryside and maintaining social harmony and stability. After the financial crisis, the
development of SMEs meets with unprecedented challenges, because the financing difficulties which
cause a series of questions have seriously hindered the development of SMEs of the province. Therefore,
this paper studies and explores the financing difficulties of SMEs in Hebei province, and puts forward
the countermeasures of cracking financing difficulties , and provides the theoretical references for the
development of SMEs.
1
The Financing Predicament of SMEs in Hebei Province
The SMEs develop rapidly in Hebei province, and promotes the rapid growth of the national economy.
But, overall, the financing difficulties of SMEs which our province faces is a common problem, and it
embodies in the lack of innovation ability and the weakness of the ability to cope with the market risk.
SMEs in Hebei province are with the manufacturing industry of low and medium-grade goods mainly,
and it lacks of high technology-based SMEs. Because of lacking of fund , the innovation ability of most
business is insufficient, the companies mainly depend on the advantage of low labor costs, but the
advantage is disappear gradually. In Hebei province the OEM of SMEs mainly influenced by the
financial crisis, the reduction of the order directly leads to the output. Then turn to the domestic market,
because they have no independent brand ,so they lack of competitiveness. After the financial crisis, the
domestic prices of raw materials and the labor price rise generally, which makes the common business
pressures and makes profitability lower. Only solving the fund problem,may SMEs improve their ability
of innovation and the development of independent brands, and just have the ability to change market
risk. At present, SMEs mainly face the two difficulties: the unreasonable of financing structure and the
singleness of financing channels.
1.1 The unreasonable of financing structure
Because of the limitation of the scales of SMEs, they can not finance in the stock market, and can only
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rely on themselves. Profit is the main source of the fund accumulation of enterprise development,
because our overall profit level of large-scale enterprises is far below the big enterprises,and the initial
capital providers are mainly related personnel and fund investors in the market, the scale of the fund is
very small. The enterprise surplus which regards as enterprise development fund is very limited in the
increasingly fierce competition today, therefore relying on capital appreciation only is difficult to meet
the development needs. Enterprise's financing decision is the key to determine its capital structure, and
seek the balance between the risk in the financing cost and benefit. But small and medium-sized private
enterprises lack of government support and financial institutions in our province, and mainly rely on the
internal financing, and then form a special financing structure. At present, the channles of small and
medium-sized private enterprises are narrow and foreign financing is insufficient, the proportion of
endogenous financing is high, which causes the unreasonable of financing structure.
1.2 The singleness of financing channels.
Due to the system and their ability etc, our SMEs have difficulty in financing through the issuance of
stocks, bonds and other direct financing ways, and they are suitable to raise funds for other financing
channels, such as the investment fund, risk investment and sorts of property right trading market which
has not been set up or stunted, and there are no unobstructed exit mechanism and high risk, the venture
benefits are hard to enter the real business enterprise. There really exists conflict between diversified
financing needs and simplification of the financing channel.
1.2.1 The high threshold direct financing
The SMEs have small scale of production and operation, and they can not compare the registered capital
with large enterprises. In the increasingly fierce competition, they has been restricted the development
of themselves. According to the management principles and standards of the current securities market,it
has the higher requirement on the scales of the enterprises who issue stocks and bonds the and the higher
return rate on investment. The most of the recommended and approved companies or the companies
which issue bonds become the leading strength in industry,which have the strength of assets, and at the
same time the projects have a good prospect .But the most of the SMEs can not reach such conditions,
so they can’t use stock and bond in the main board to finance in the domestic, so the situation of
directing finance is not sound.
1.2.2 The difficulty of bank loans
The majority financing fund of SMEs is from the bank at present. But the dominant of the bank are still
four state-owned commercial banks. Suffering from the financial crisis, the banks all pay more attention
to the safety of loans, and the benefit is for large enterprises, not SMEs because they don’t have enough
mortgaged property guarantee to get the loans. LiYiZhong, the MIIT minister has said, in international
financial crisis, the environment of business is difficult, banks have tighten lending conditions to SMEs ,
especially small enterprises. Some banks offer loan to SMEs with floating rate and additional
requirements, or collect deposits or financial cost and increase the financing cost of enterprises. At the
same time, the state-owned commercial banks carry out the strategies of major cities and large
enterprises, but the strategic policy guidance is not focused on small enterprises, and the trend of loaning
to big cities and large enterprises is increase. It is doomed that small and medium-sized private
enterprises facie more financing difficulties.
2
Reasons for the Financing Problem of SMEs
There are many reasons explaining the difficulties of SMES, and the specific situation of different
companies vary widely. The following parts analyze those reasons form three aspects: the businesses,
the governments and financial institutions
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2.1 Factors of Enterprise itself
2.1.1 The risk of operation
SMEs, each individual is in small scale, and its market competition is weak. Its lack of brand strength
and influence lead to the economic instability and market uncertainty, so there is higher business risks,
and its lack of adequate collateral and guarantees lead to the difficulty for the loan because they can not
meet the assessment requirements of financial institutions. The governance structure in SMEs is not
standardized, and the SME business management systems in many ways are non-standard compared
with large enterprises, which have relatively perfect rules and be managed regulately. Some SMEs
implement “directors and managers responsible for system”, contracting, or leasing, and their liability
binding is poor; also, the quality of its operation is very low if the quality of the event managers is poor ;
besides ,there is greater uncertainty management .All of these factors contribute to the greater risk
financing.
2.1.2 The financial system is not perfect
The managers of many SMEs lack the financial knowledge, and they do not form a scientific base for
decision-making. These caused widespread financial system imperfect, their financial reports untrue and
inaccurate, and these tend to increase the bank's cost of getting access to enterprise information, to the
problem that enterprises do not attach enough importance to financial management, and to view them as
an option to work fail to establish effective financial management system. Meanwhile, the lack of
rigorous use plans of capital, poor internal capital allocation power, emphasis on profits and ignore the
importance of liquidity management, poor financial operations, and the use efficiency of capital is low.
Most SMEs in our province exist some problems: less fixed assets, current assets changes quickly,
intangible assets are difficult to quantify, less assets can be mortgaged to meet the requirements of bank
loans . Commercial banks are hard to acquire these reliable financial information, to find out the true
condition of business, so out of the awareness of risk prevention, banks are reluctant to lend money to
SMEs ,these further increased the difficulty of SMEs’ lending.
2.1.3 Credit awareness is not strong
Widely spread existed phenomenon in SMEs: lack of SME credit and its base, and because our society
has not yet established a unified corporate and personal credit system, there exists severe asymmetry of
information between banks, investors and enterprises, also financial legislation and financial regulation
is relatively lag ; all these lead to the formation of a breach of the psychological that financial market
returns should be over expected default costs, resulting in a number of private SMEs lack the internal
motivation and integrity of its own business reputation to maintain enthusiasm. Once a number of
private SMEs face financial difficulties, they often turn to "withdraw its role" way to escape debt, to
transfer risk, resulting in generally low credit rating of private enterprises, these not only can not meet
the bank's credit requirements, but lack of attraction to venture capital investments and various social
capital, so their financing needs are difficult to meet.
2.2 Government policy and institutional environments
2.2.1 Credit guarantee system is not perfect
The credit guarantee system for SMEs in our province is imperfect, although it have the scale in some
industries, in the organizational structure, operating mechanism it is still insufficient. As a huge number
of SMEs, the demand for loans is varied, the government-funded guarantee institutions can not satisfy
the needs of SMEs. Even in the U.S., Japan and other large-scale government-funded countries,
policy-secured loans do not exceed 10% of SME loans. Therefore, the SME guarantee must play a role
as that of the private capital and commercial security .Private security agencies, a relatively small
number of SMEs, with limited warranty, guarantee funds and small size, lack of risk reserve, low
guarantees magnification, can not meet the rapid development of private financing needs of SMEs .This
fact result in many SMEs who need loans fail to get access to them just because no suitable guarantee is
available. In addition, the guarantee agency's source of funds is single, mainly government funds, so the
government intervention is excessive. SMEs also lack the support to the credit guarantee institutions and
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appropriate policies and regulations who offer private loans to SMEs. As a higher risk of credit
guarantee and the credit guarantee system for SMEs in our province is not perfect, these factors lead to
SMEs, especially private SMEs, facing more financing difficulties.
2.2.2 Imperfect market credit mechanism
The sense of social credit is not enough, especially in the financial sector, the lack of credit becomes
even more serious. So far, China still has not established a sound, fair, and open credit management
service system; and it does not form perfect credit restriction mechanism in society; the lack of an
effective penalty system of breaking promise; these make the existence of private small and medium
enterprises integrity awareness poor, and awareness short duration problems . The risk of private
financial institutions offering loans to SMEs is high, so financial institutions generally expressed distrust
to private SMEs.
2.3 Financial institutions factor
2.3.1 Lack of financial services for SMEs
At present, most SMEs in our province concentrated in the county and township levels. However, due to
internal bank lending authority gradually on, primary branches, especially the right of county-level
branches has little lending rights, so there was a contradiction between information and power
asymmetries: primary branches has a better understanding about the credit situation to SMEs, but lack of
appropriate lending authority; parent body, though they have greater power, but the enterprise does not
know that real institutional credit limits on credit support for SMEs. The amount of demand for funds is
small, but high frequency, quick to its place. However, the commercial bank loan approval process is
very strict. SMEs who want to get a modest number loan usually requires a week or even months time,
so some enterprises wait too long to give up the initiative, or some enterprises get money even after the
business opportunities have been bungled. State-owned bank loans’ harsh conditions, and market
positioning are not appropriate. Financial conditions of state-owned commercial banks are higher, and
for the County Private, lending to SMEs needs to attach some additional requirements, which can not
satisfy the private SMEs "urgent, frequent, fast" characteristics of the funds demand, so the result often
is that, the majority state-owned commercial banks who master most financial resources can’t offer
effective financial services to private SMEs. In addition to loans demand, SMEs, in clearing, consulting,
financial management and so on also have an urgent requirement. Private SMEs, because of their poor
financing capability, small production scale, and low management level, less information, etc., are
difficult to solve many problems in financial management, financing, and other problems in operation
only on their own, so we should encourage banks to diversify their all-round financial services to SMEs.
But the fact is, the variety of financial services is a single, and it is difficult to meet the needs of private
SMEs.
2.3.2 Small number of medium and small financial institutions and weak strength
In our current financial system, who is in the predominant status is the state-owned commercial banks
and they offer services to the state-owned large and medium enterprises , and the number of the foreign
banks, joint-stock banks are small ; furthermore , very few financial institutions, offer services to private
SMEs specially; all these led to the financing obstacles of SMEs . Recently although we have a group of
small and medium financial institutions. But their positioning, management mechanism, financial
institutions regulatory system is not perfect and so on, so the ratio of loans to SMEs is less; at the same
time, under the government financing control, the environment for the growth of non-state-owned
financial institutions is more difficult, and their size is still relatively small, and they dispose very limit
financial resources, therefore, financial support for the economic growth of SMEs is very limited.
Although the growth of SMEs is rapid, the development of the small and medium sized financial
institutions from who they acquire the primary service is relatively slow, the same as the private banks.
3
Suggestions to the Financing Problem of SMEs
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According to the reason of this financing problem, to solve it, we need the enterprises, government and
the financial institutions work together and cooperate in a long term. Only in this way can we promote
SMEs in our province to develop actively.
3.1 Improve the financial system of SMEs
The financial system is one core of the enterprise management; a sound financial system is an important
condition for financing capability. The perfect enterprise financial system can provide the true and
reliable financial information. Firstly, we must establish the strategic core status of financial
management; promoting the financial management transform from passive accounting to active
management. Not only do the recording and the processing of financial data correctly, but also research
the accounting standard system seriously, to ensure the accuracy of the initial financial data and to
improve the efficiency of the accounting. Secondly, enhance establishment of the system, build and
improve the financial management system of the private enterprises. Establish special financial
management institutions to be responsible for the enterprise financial intermediation, cash registering,
accounting management, payroll accounting, fixed assets, budget compilation and the implementation of
final accounting. Formulate the relevant financial management system, make financial management
standardized and institutionalized, improve the financial processing, standardize accounting practices,
build the inter control system, enhance the financial supervision of the private enterprises. Implement
the financial management pattern of “plan in advance, control in processing, analyze after processing” in
enterprises, establish the improved internal audit system. In addition, the SMEs should be well familiar
with the development of the market, analyze and forecast the trend as well as possible, make sure the
limited capital to maximize the benefits , to strengthen financial regulation, to make the transparent
financial management to provide the private enterprises for a strong guarantee for their successful
financing.
3.2 Banks should improve service for SMEs by developing new financial innovations
Banks should formulate the assessment, credit and authorization system which is suit for SMEs,
appropriately delegate the approval authority to loan liquidity, relax the loan restriction on basic level
banks, form the high efficiency approval procedure , and organize the credit department which serve the
private SMEs specially. In these ways, the bank can provide them with active and effective service in
payment, exchange, financial management, consultation and assessment. Meanwhile, the bank should
increase the innovation of core personal banking products, develop the bills and other services actively,
enrich types of financial products.
3.3 Government should build and improve the credit guarantee system
Firstly, government should establish the credit guarantee institutions for the private SMEs in our
province, provide guarantees for the credit guarantee institutions which serves the private SMEs,
promote the development of the voluntary re-guarantee service steadily. Secondly, government should
also implement and improve the access system, credit assessment and risk control system, industry
coordination system and the self-regulation system for the guarantee institutions; at the same time, to
implement the examination system and qualifying certificate system for participators who will embark
on this business. In addition, the government is supposed to establish and perfect the social credit
guarantee system, and improve relevant laws and regulations to pave the road for commercial banks to
provide credit to the private SMEs. Meanwhile, it should regulate, enhance and promote the
development of the credit guarantee business. Moreover, the government should formulate a series of
microeconomic control mechanism and policies and induct the capital flow to the private SMEs, provide
guarantees and assistance for financing which needed by the private SMEs.
3.4 Encourage the development of small loan companies to broaden the financing channels
We should develop the private finance as possible as we can. Enlarge the pilot areas of small loan
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companies. In October 2005, China started to implement the small loan company pilots for the purpose
of serving the "three rural" and small businesses. In October 2008, the government issued a standard
pilot guidance. Small loan company pilots in our province stated in 2006, by the end of June 2009, there
are 132 pilot companies in our province, they totally loans 16.7 billion. So, the small loan companies
have become the important supporter to SMEs in our province.
Acknowledgements:
This paper is supported by the project of Science and Technology Department of Hebei province which
named the countermeasure research on capital market financing of the technological SMEs in Hebei
province.(NO.10457203D-15).
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