SMEs Financing

Small and medium financing was a funding provided by the bank to represent a major source
of the general financial market. Small and medium-sized enterprises (SMEs) was slightly
different with big enterprises, they need might use to trade for financial, working capital,
machinery purchase, project finance and other function and purpose.

The SMEs financing is important because most of the business started from scratch, without
any business credit for backup, subsequently, SMEs financing turns into a straw of help for
them. First of all, SMEs financing can use to help you build your credit initially for your
business. For instants, capital expenditure small and medium enterprises can use the capital to
purchase equipment and important machinery. Besides, the companies could use it for the
expansion of business in the future. The next purpose of SMEs financing is for working capital
uses. If the working capital ratio is higher, that means the company short-term financial is
healthy. It also indicates a good view, because the company can use the extra capital to do
investing and for their daily operating expenses.

1. Biz123 program
Every bank has provided SMEs financing and loan for small financial enterprise also no
exception. In this case, CIMB has launches several project and cooperation with the
government institution in order to implement SMEs financing and Biz123 effectively.

CIMB bank had provided a financing loan under SMEs to all economic sectors for capital
expenditure and working capital. CIMB bank had launched a project called Biz123 to give the
SMEs a one-stop solution support. Biz123 that launched by CIMB was a platform that offers a
complete range of business solution to the sole proprietorships to small and medium-sized
enterprises (SMEs).

Biz123 has abiding by three pillars which are complete solutions, fast and easy tools, and one-
stop support. From the stars news, we can know, SME had already contributed 36% of Gross
Domestic Product (GDP) in the 2017 year, and the CIMB group deputy CEO, Mr. Ahmad
Shazli believe in the 2020 year the figure will rise from 36% to 40%.

2. MOU program
The second program launched by CIMB Bank was memorandum of understanding (MoU)
program which is cooperation with Credit Guarantee Corporation Malaysia Berhad (CGC)
together with signed up an agreement to offer up to a total of RM1 billions of Enterprise Clean
Loan (ECL) as part of their joint initiative to nurture and develop Malaysian SMEs. CGC's
President & Chief Executive Officer, which is Mohd Zamree Mohd Ishak. Said, this program
not only to provide greater access to financing for SMEs but also to leverage on CIMB Bank's
enterprise business solutions and extensive network of branches to expand our SME outreach
nationwide

3. Application of SMEs financing

The step that for apply the SMEs financing is: firstly, gives the CIMB your information, next
is write a streamline about your business history, in further, register with answers some
question for verification, the last compare and choose to find the best product and wait to hear
from the bank within two working days.

For the term and condition how to eligibility to apply SME financing is: Registered with the
Companies Commission of Malaysia (SSM), authorities/district offices in Sabah and Sarawak
or statutory bodies for professional service providers; Maximum shareholders’ funds not
exceeding RM5 million; Shareholding by Public Listed Companies and Government Linked
Companies (if any) in the SMEs shall not exceed 20%; Malaysians residing in Malaysia hold
a minimum of 51% shareholding in the SMEs

And the restriction that included: Purchase of shares; Refinancing of existing credit facilities;
Purchase of land/ real estate investment; Properties development; Investment holding
companies; Activities where stock in trade is money (including credit, leasing, factoring and
insurance businesses); Gambling , alcohol, tobacco or other similar type of activities and
products; and Non-Shariah-compliant business activities (applicable for Islamic financing)
SMEs Financing Risk
SME financing risk is that possibility of being unwell implemented of SME raising funds, the
wrong estimate expected return, uncertainty of investment and other imperfections or
uncertainly event will affect SME raising their fund benefits. The factors will affect SME
financing risk, those included credit risk; transaction risk; collateral risk; liquidity risk, and
policy risk.

1. Credit risk
Credit risk is the possibilities that counterparty default or failure meet their loan contractual
obligation. To ensure SME had the ability to meet their obligation, SME must do the credit risk
assessment before their process the financing loan. From the research, every company had done
the appropriated credit assessment modelling to make sure they can afford it. According to the
article from James and Hwan (2006), the result shown small and medium enterprises are riskier
than large business, during a process of giving out a loan. The small and medium enterprises
are more constrained by financing than large enterprises.

2. Collateral risk
Collateral risk, in this case, typically lenders will request collateral in order to mitigate the risks.
For new SMEs firm, collateral as an obstacle by the SMEs when they are accessing financing.
In some situation, because the firms are too new, the enterprises may be unable to provide
sufficient collateral to lenders. In other words, the current size of the firm is not capable of
expansion they business. In the worst case, if borrowers cant’s payout the principle and interest
on time, the mortgage will be auction by the lender.

3. Political risk
The political risk is referring to the risk that a company could suffer in return on their
investment based on government policies, the legislative body, and foreign policymakers.
There are various decision making by the government has a direct impact on the small and
medium enterprises. Such as SST, trade tariffs, labor laws, and others more policy that can
direct brought negative impact to the SME. One of the examples is according the news form
Sinchew, to maintaining our local country food culture, starting from 2019, the entire restaurant
must hire local people to be chiefs. And another policy was Nepal decided to stop supply their
workers to Malaysia. Those policies will bring a lot of affection to our country especially SME.
Because most of them were very dependent on foreign workers in operating their business with
cheaper labor cost.
4. Liquidity risk
Liquidity risk is referring to how the asset can be converted into cash in a short period if that
SME can convert the asset into cash in short-term period means the firm is stable and perform
well in operation. Normally how the liquidity risk happened, for an example when the market
breaking down, enterprises need some cash flow to continue operating their business, but they
didn’t have enough money, they decided to sell off the real estate, but no buyer wants to buy,
the SME investor force to decrease the market price sell under the list price. Most of the
enterprises will endure this risk, especially SMEs because they scale was small and medium.

5. Transaction risk
The last but not least is transaction risk, the transaction risk occurs when SMEs perform
business activities within or out of the country, so normally, the transaction risk sometimes has
associated with exchange rate risk. They may happen at the same time. Usually, this will
happen when the greater the time differential between the entrance and settlement of the
contract. For example, if SME deal with US company, and get the profit from US dollar, but
US company pay the amount on next week. If Malaysia ringgit rate is expected to drop or the
market hugely fluctuates, SME will endure transaction risk which is convert US dollar to
Malaysia ringgit and exchange rate risk.
References
CIMB-CGC MOU for RM1 billion SME Financing. (2016, May 23). Retrieved from
https://www.cimb.com/en/news/news/2016/cimb-cgc-moufor-rm1-billion-sme-
financing.html

ImSME – Malaysia's first SME loan/financing referral platform. (n.d.). Retrieved from
https://imsme.com.my/portal/en/?gclid=EAIaIQobChMIlN-fj7-
S3QIVlw4rCh0dygNpEAAYASAAEgKLvfD_BwE

Kolari, J., & Shin, G. (2003). Assessing the profitability and riskiness of small business lenders
in the banking industry.

SME – All Economic Sectors. (n.d.). Retrieved from

https://www.cimbbank.com.my/en/business/products/financing/bank-negara-malaysia-
funded-loans/sme-all-economic-sectors.html

Vashistha, S. (2017, August 07). CIMB launches Biz123 to give SMEs a one-stop solutions
support - Business News | The Star Online. Retrieved from
https://www.thestar.com.my/business/business-news/2017/08/07/cimb-launches-
biz123-to-give-smes-a-one-stop-solutions-support/