There is an SME financing gap in Asia – some challenges faced by SMEs include often having difficulties in obtaining credit and equity investments due to limited access to financial inclusion, advice and services from banks, governments or other institutions.
SMEs’ challenges of financial inclusion
You’re a small- or medium-sized enterprise (SME). You have a great product or service, but you can’t find the capital to grow your business. That’s because you’re competing with larger companies that have better access to credit. This is often one of the biggest challenges faced by SMEs. The gap between what SMEs spend and receive in business financing is substantial: on average, SMEs spend nearly US$20 billion (RM 92.96 billion) annually on working capital, while they receive only US$2 billion (RM 9.3 billion) in formal bank loans.
SMEs have difficulties in obtaining equity investments
SMEs have difficulties in obtaining equity investments, loans, and credit. Banks often do not provide these services to SMEs because they lack evidence when assesing the creditworthiness of an individual or an SME to take the financial risk. Often times SMEs applying for bank loans are too young to, and banks need a financial history of more than a year to make risky decisions. Like investing in a small business.
SMEs often have limited access to financial advice and services from banks, governments or other institutions.
Banks and other financial institutions often overlook SMEs because they are not profitable enough, or they may be too small to warrant the time and resources necessary to offer services. In addition, banks may be reluctant to lend money due to a lack of expertise in handling these types of loans.
An SME’s challenges of financial inclusion, including the ability to successfully apply for a loan are also hampered by many factors, including:
- Limited access to financial advice and services from banks, governments or other institutions
- Lack of knowledge about how to start up a business (or how much capital will be needed)
It is important to close the SME financing gap in Asia for the benefit of society as well as for profit-making reasons
Large corporations have a significant impact on the economy, employment and growth. They are also perceived to be more efficient than SMEs because they can employ economies of scale and scope, which allows them to grow more quickly and efficiently than SMEs. However, it may surprise you that SMEs are responsible for creating most jobs in an economy — especially small companies with less than 50 employees (SMEs). 95% of businesses worldwide are SMEs, despite their limited access to financial inclusion, advice and services from banks, governments or other institutions.
In addition to creating jobs, studies show that innovation comes primarily from smaller companies rather than larger ones. This is because innovation driven by small firms is usually done as part of their everyday operations rather than being planned out beforehand at a research institute or university as happens with larger companies like Google or Microsoft who have teams dedicated specifically towards research & development (R&D).
Thus, the need to close the SME financing gap in Asia is crucial to ensure the continued growth of the region’s economic sector – it is wise to empower those who hold 95% of Asian businesses. There are initiatives currently in play to boost the business financing opportunities that are available for SMEs in Malaysia. Get more insights and views about those options for SMEs on our blog.