THIS week the Fiji Export Council (FEC) sheds light on a major challenge faced by small medium enterprises (SMEs), which is access to finance.
After reviewing workshops and seminars conducted by the FEC over recent years on export readiness, one of the biggest challenges for development raised by SMEs in Fiji is the availability of finance.
According to the Fiji Export Council, the vast majority of our SME members state that the basic deterrent in developing their business was the lack of availability of loans and credit from the banks they approached.
Financial institutions are hesitant to provide the much needed funds to new and existing businesses as there’s a high risk of failing, and there is no revenue generation to service any debt.
The World Bank’s Global Enterprise Survey shows that 44 per cent of entrepreneurs identify access to financing as one of the major obstacles facing the development of their enterprise.
Without access to financing, enterprises can neither be established, nor invest in their growth and expansion.
So what is hindering SMEs from accessing funding they need?
The FEC identified five major obstacles they believe deter financial institutions from lending to SMEs in Fiji:
* lack of collateral;
* lack of adequate financial records;
* incomplete business ideas;
* inadequate financial literacy;
* high transaction cost;
* misuse of funds; and
* over commitment.
“Access to finance is usually identified as a critical constraint. While financing is almost always a challenge for SMEs, the difficulties are often intensified by the expatriate status including lack of collateral, property rights, regulations, laws, and customs,” said FEC chief executive officer Jone Cavubati.
“Other hurdles to entry and business growth include the lack requisite information such as proper accounting records, financial statements, bankable business plans, lack of security and operating in disconnected value chains makes it difficult for banks to assess the credit worthiness,” said Mr Cavubati.
To overcome these barriers, the FEC strongly advises its SME members to focus on the following to increase their chances to secure funding:
* accessing collateral free financing opportunities;
* adequate financial literacy;
* complete business ideas;and
* adequate financial records.
Out of the four mentioned above, one that is considered a major constraint is the lack of tangible collateral.
Nowadays, there are alternative sources of financing available which enables SMEs to get the funding they need without providing any collateral.
According to the council through its member SMEs, one source that is emerging as a popular method of raising business capital for SMEs globally is through crowdfunding.
“For startups, crowdfunding is an ideal funding alternative. It’s an opportunity to test products, get feedback, and establish a customer base.
“One of Singapore’s successful crowdfunded products is the Bucaneer 3D printer by Pirate 3D.
“The company’s kickstarter campaign raised $US1.438 million ($F3m) against their $US100,000 ($F208,853) goal.
“The Bamboo Bee, a bamboo bicycle created by Singaporean Sunny Chuah, raised $US63,879 ($F133,413) against a $US40,000 ($F83541) goal.
Government run programs exist in order to improve lending to SMEs, which allows collateral free lending through banking finance with government guaranteed funds.
In an effort to promote and develop the local business industry, improve private sector lending to small and medium enterprises (SME) and stimulate growth, the Fiji Government has allocated funds for the establishment of a SME credit guarantee scheme (SMECGS).
Government has provided a total allocation of $4.0m to fund the scheme, which will be administered by Reserve Bank of Fiji.
Under the scheme, government will guarantee to pay 50 per cent of the principal outstanding on defaulted SME loans up to a limit of $50,000 per business.
The guarantee covers lending to all sectors except for loans to sugarcane farmers and government-subsidised businesses.
The SMECGS is expected to improve SME access to finance and at the same time enable lending institutions to share part of the risk with Government.
We are highlighting this SMECGS because it is currently being underutilised and our financial institutions continue to ignore offering this scheme to SMEs.
* Next week we will look more into crowd funding and create more awareness on the SME credit guarantee scheme.
For more information contact the Fiji Export Council on info@fijiexportcouncil.com