Financing the SME Value Chains

Abstract

This research work is built upon case studies from Malaysia and India and surveys conducted on the supply and demand of SME finance in Malaysia. Addressing SMEs’ needs for finance, it is assessed that formal financial lending organizations represent a weak link in the financial supply chain for SMEs in the region. A lack of collateral and limited access to venture and growth capital are some of the obstacles that SME owners face when seeking finance for their businesses. This lack of affordable financing options stymies the growth of SMEs in Asia.

This work classifies nine areas of demand for SME capital and suggests that banks in the region need to redesign their lending portfolios to better evaluate and manage the SME’s needs for finance. To help clarify the risks, this paper shows how the different sources of SME financing could be weighted with the so-called 5Cs framework viz. capacity, capital, character, collateral and condition. It suggests that the lending organizations should adopt more innovative ways to analyze SME loans, and gain a deeper understanding of how these enterprises fund their supply chains. Eleven key devices or mechanisms are discussed to leverage the lending process.