Funding
Alternatives for SMEs
A.Problem identification
B.Local funding
C.International Funding
How can a small business raise funds from
overseas?
A.Problem identification
The most challenging task of a small-to-medium enterprise (SME)
is financial management. Money for start-up cost, money for fixed assets
investment, money for working capital, money for expansion, money for
contingenciesˇKare the main sources of stress and strain of daily business
operation. A study prepared by the Small Business Administration (SBA) in the
US in 1996 identified ˇ§lack of moneyˇ¨ was the cause claimed by 83% of
entrepreneurs for their business failures.? Henry Ford, the business legend,
had only one Golden Rule on business to pass on, ˇ§Never run out of cashˇ¨.
For owners of SMEs in emerging markets, the money factor is more
critical. Governments in these countries do not have as many assistance
programs for SME like those in the US, Japan or Europe. Their choices of local
funding are usually limited to relatives, friends, loan sharks or black-market
banks. The regular financial institutions require too many collaterals and
mortgages due to the non-availability of credit reporting system. Meanwhile,
international funding is strange and complex to these SMEs, even if the legal
and economical environments are favorable.
The objective of this section is to de-mystify the process and
players involved in international funding so local SMEs could tap into this
resource more readily.
B.Local funding
If possible, SMEs should always look into local funding sources
first. They are easy to access, they speak the same languages, both understand
the legal system, and more importantly, approval could be fast. For bigger or
state-owned enterprises, the best option is to evaluate and find a suitable
investment banker who is experienced in raising money in the same industry at
about the same deal size. For SMEs, solution could be found with:
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Regular financial institutions: banks, local funds, finance
and leasing companies, insurance companies. Each of these institutions has
their own funding criteria and SMEs should contact them directly to understand
first their requirements.? Sometimes, SMEs must use a bank for working capital
need, another leasing company for fixed assets investment and a local fund for
risk capital.
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Private money lenders: family, friends, black-market banks,
loan sharks. If the regular channel is not available, many SMEs are forced to
use a back-door approach. These funding sources are risky, expensive, emotional
(when dealing with friends and family members), and in general, not good for
your health.
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Listing (IPO) in local markets: waiting time, listing
qualifications, liquidity or manipulation are the common problems of many
emerging stock markets. In addition, the exit strategy of owners might be
hampered by government regulations and tax authorities.
C.International Funding
Overseas funding are more suitable to larger-sized operations
due to the cross-country legal and auditing cost. Realistically, if the
estimated market valuation of a SME is below US$10 million, with low growth
prospect, its chances of obtaining international funding are very limited.? The
positive aspects of overseas funding include the diversity of funding sources,
the long-term perspective of investors and the valuable assistance in
management practices. International financiers could also help local firms in
finding strategic partners, technology transfer solution or export market. The
sources of overseas funding include:
1.Financial institutions:
Operating principle: International financial
institutions are governed by strict governmental regulations and internal
guidelines. Their risk tolerance is extremely low; therefore, their funding
practice emphasizes deal size and management experience. Small start-ups and
low profit SMEs are certainly not their desirable customers.
Types: banks, finance and leasing companies, insurance
companies. Among these, leasing companies are suitable for most fixed assets
purchases such as machineries, car, trucks and equipment; while banks are keen
on import-export lending. Account receivables financing are available at most
places if your customers are credit-rated. Insurance companies prefer real
estate or long-term lease on aircrafts, but legal requirements are strict.
2.Venture capital/ Angel investors
Operating principle: Like their name suggests, these
investors are taking major risks in backing start-ups with potential of ˇ§home
runˇ¨ (big success). They usually lost money in 8 out of 10 deals, so they
require a return of 100 times on the remaining 2 winners to cover the loss.
Their favorite playground are the cutting-edge technology companies (hi-tech or
bio-tech) with enormous market potential. They usually invest in equities, with
options; and they demand a large slice of your company. However, they could
also help with management practices and industry networking.
How to locate: Most countries have their own VC
(venture capital) associations with complete contact address. Make sure you
search for the right VC which specializes in your industry and your deal size.
3.Hedge funds
Operating principle: Hedge funds are diversified in
size, investment objective and operational strategy. Most of them prefer
short-term investment horizon, as their shareholders do not like to be locked
in long-term contracts. Any deal size or type is possible, but you must have a
good understanding of their investment strategy before approaching.
How to locate: Directories of funds are available for sale by many
international data provider. Check your search engines for contact address.?
4.Public listing
Overview: Overseas stock exchanges, especially those in
US, Europe, Japan or Hong Kong, offer better liquidity (bigger trading volume),
less volatility, easier for owners to exit, higher prestige and stronger
networking potential thanks to international exposure. However, the IPO and
maintenance cost of listing is much more expensive, corporate governance
requirements are stricter and investor communication might be a problem for
local SMEs.
Venues: The US might be the most desirable, but NYSE
(New York) or Nasdaq have listing requirements beyond the reach of most SMEs.
The AMEX (American Stock Exchange), the OTC board and the Pink Sheets listing
could offer excellent alternatives to SMEs. In Europe, while LSE (London) or
FSE (Frankfurt) might have high listing standards, the EuroNext or AIM could be
more suitable. Tokyo, Hong Kong and Singapore all have secondary boards catered
to SMEs. Many other regional exchanges in Malaysia, South Korea or Dubai could
also be considered.
Little-known facts: Local SMEs plan to seek overseas
listing should look into the OTC board in the US or a RTO (reverse take-over or
reverse merger). These two venues are quick, lower cost and deliver to SME
owners the same benefit as any other listing choice. Since this subject is of
most interest to SMEs, we present the OTC market in the US as well as the RTO
method in a separate article.
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