PROBLEMS OF SMEs IN OBTAINING FINANCE Presented by : Reuben Saliba Manager, SME Unit Bank of Valletta plc Bank of Valletta plc

PROBLEMS of SMEs

OVERVIEW

Economy is characterised by a multitude of SMEs. STATISTICS  enterprises  45 establishments employ persons  95% micro businesses (majority of which are services related including wholesale, retail, transport, catering, recreational businesses.)  4% small businesses  1% medium A large segment of the Maltese economy follows European trends.

THE EU PERSPECTIVE

European research established that European research established that :Banks  look on how to develop an effective and efficient relationship management policy as a main problem. SMEs believe that Banks :  charge too much  are excessively risk-averse  have high collateral requirements  lack risk capital  are insufficiently transparent  behave inconsistently

European research established that European research established that /cont… Accountants see Banks as:  concentrating too much on risks  not valuing adequately the qualities of the entrepreneur  not relying on the future cash flow  being detached from their customers

The banking needs of business customers are seen as having :  low transaction costs  low interest rates  transparent relationship  sufficient amounts of lending  flexible borrowing arrangements

The Bank’s point of view  Banks operate on thin margins and while their downside is 100%, their upside rarely exceeds 5%.  To control their risks, Banks must therefore u use formal screening procedures including classification of risk. u demand various levels of security It is common for Banks to be confronted with absence of a track record, incomplete financial data or lack of collateral.

Challenge to Banks  Improve efficiency by applying latest information technologies  develop standard financing products  identify profitable market segments  find solutions to problems caused by lack of collateral  extend product portfolios

DEFINITION Characteristics & Sources

Characteristics of SMEs 3 main characteristics :  Economic Factors u small share of market i.e. not dominant of operations  Owner Manager u frequently involved in day-to-day running of business in a personalised way and not through a formalised management structure.  Independent u does not form part of a large group which can provide a financial umbrella.

EU Definition of SMEs An enterprise having :  less than 250 employees  annual turnover not exceeding EUR 40 million approx. (£23 million)  balance sheet total not exceeding EUR 27 million approx. (£15 million)  No corporate company (non SME) owning more than 25% of capital or voting rights.

Local Criteria Who classifies as an SME ? Self Employed  where the no. of employees does not exceed 5. Small  no. of employees does not exceed 10 (EU -50)  annual turnover does not exceed Lm400,000  where the total assets of the company does not exceed Lm200,000.

Local Criteria Who classifies as an SME ? /Cont... Medium  number of employees does not exceed 55. (EU - 250)  annual turnover does not exceed Lm1,600,000.  total assets does not exceed Lm800,000.

Sources of Finance  Own resources / personal funds / internal financing (ploughing back profits into business)  Creditor finance  Loans from relatives and friends  Government support - through Malta Enterprise & Kordin Business Incubation Centre  Joint ventures  Business Angels  Alternative company listings on stock exchange  Financial intermediaries

PROBLEMS of SMEs

Overview  Lack of managerial competence - no formal training in professional management  Insufficient start-up capital  Size of local market  Limited finance resources / access to capital market  Communicating abilities

Problems encountered with Banks  Financial monitoring - forecast & actual cash flow  Setting up a sideline business - drain effects  Lack of monitoring of individual business activities  Misuse of overdraft  Keep up to date with competition (especially retail outlets).  Wrong assessment of start-up costs.

 Accounts prepared for ‘Tax purposes’  Ongoing relationship with Branch manager  Dissipation of profits into luxury items  Turnover dependent on 1 customer Problems encountered with Banks /cont...

Other problems  Gearing - to what extent is the business financed through capital/retained profits & other shareholders’ funds  Lack of planning  Extended credit periods

RISK ASSESSMENT OF PROPOSALS

Points looked for by Bank (1)  Background & track record (i.e. ability & integrity of proprietors)  Overall objectives of the business (purpose)  Product or service provided by the business.  Market where the business operates (the changing competitive environment)  Customer base of the business.  How the business sells its products  Pricing policy

 Promotion and distribution  Competition  Physical resource requirements of the business  Human resource requirements  Up-front contribution  Repayment feasibility  Security  How well is the customer prepared to do business Points looked for by Bank (2)

SME - BANK RELATIONSHIP

The basis of such a relationship is the Method of Communication which is the cornerstone of any successful organisation. Effective bank/business communication.  Allows banks to respond earlier to the needs of the business.  Improves risk management  Reduces reliance on collateral  Improves opportunities for cross selling.  Enables bank to provide better advice & support

To this effect, the Bank has embarked on an ambitious project in changing its traditional methods of communicating with its customers : this includes altering the physical layout of its branches.

This relationship concept led to the setting up of the first SME Support Unit in Malta. The main objectives of the Unit were : Analyse the state of health of a businessAnalyse the state of health of a business Identify solutions to financial problemsIdentify solutions to financial problems Discuss and develop a Business PlanDiscuss and develop a Business Plan Prepare and submit an application to the Bank orPrepare and submit an application to the Bank or other intermediaries for financial assistance other intermediaries for financial assistance

As part of the business segmentation process the Bank established five Business Centres to cater for a more personalised service and a quicker decision process.

Bank Business Segmentation  Branches cater for business proposals up to Lm30,000.  Business Centres cater for proposals between Lm30,000 up to Lm500,000.  Corporate Centre cater for corporate customer’s proposals in excess of Lm500,000.

Business Centres aim to broaden the customer’s business horizons through:  Own internal network.  Mediterranean Bank Network.  Overseas Correspondent Banks.  Bank own overseas rep. Offices.  Representation in Malta Enterprise.  EU Framework Programmes.  Representation in KBIC. Other Business Centre functions:

Thank you