The Asian financial crisis hit small- to medium-sized enterprises (SMEs) hard in Hong Kong. While the media is awash with stories of financial institutions and venture capitalists throwing cash at dotcom-ers, old economy SMEs are strapped for cash.
When Tony Li, managing director of Upgrade Business Forms Manufactory, wanted to expand his printing business, he baulked at the idea of approaching his bank for a loan. Despite Upgrade's good relationship with the bank and sound track record, he was sure of rejection given the downturn in the property market. A good credit rating and solid profits just didn't cut it when applying for a loan in Hong Kong where, traditionally, banks require real estate and fixed asset collateral when making loans to SMEs. And in the dark days of the financial crisis where the price of real estate slid with the markets, SMEs were left floundering.
"The banks place too much emphasis on real and tangible collateral," says Eugene Fung, assistant director of industry and spokesman for the HKSAR government's Special Finance Scheme for SMEs.
"During the crisis, SMEs found that the value of their real estate and fixed assets had dropped, so banks, naturally, were reluctant to lend or extend their credit, and many SMEs faced a liquidity crunch problem," Fung says.
With SMEs making up more than 98% of businesses, and employing more than 60% of the workforce, things looked grim.
In August 1998, the HKSAR government launched a $5 billion scheme aimed at assisting SMEs secure loans from participating lending institutions by acting as guarantor. Under the scheme, the government guaranteed up to 70% of the loan for a maximum ofátwo years. Since the launch, 12,978 applications have been received with onlyátwo rejections.
Inevitably, with those statistics, the candy jar is now empty. Figures released by the government show that by March 2000, the HKSAR government had committed 5.5 billion in the form of 11,697 loans. So far, only 1,151 loans have been discharged, freeing only a trickle for recycling as guarantees for new SME loans.
So where to now?
Ironically, Upgrade's Li turned to the new economy for help. SMEloan.com provided an easy, no collateral solution for Upgrade. An online facility which provides working capital loans based on accounts receivable, SMEloan.com allows the SME to apply for the loan and be notified of the status of their application on-line, and to enter in their sales information into SMEloan.com's database online.
"The real beauty of the SMEloan.com's business model is the reporting process.áIt's different from the way banks and financial institutions look at traditional finance," says Brian Doyle, director of SMEloan.com's parent, private equity company JH Whitney.
"In the old system, companies will have to send their invoices which would be inputted manually in to the bank's system. Under the new system, companies would enter the information straight into SMEloan.com's member website resulting in much less errors and much less cost. We are pushing the paperwork back on to the customer."
Is SMEloan.com eating into the banks' market? One banker says, no, since SMEloan.com is looking at financing from a different angle. Financing based on receivables hasn't caught on in Hong Kong, and SMEloan.com is financing a niche market that previously would have relied on personal loans, credit or overdrafts. So far, SMEloan.com's approval rate is between 12% and 15%, and receives between 120 to 200 applications a week.
"The banks are watching us very carefully," says Ming Siu, CEO of SMEloan.com. "They are curious about us. We are new and doing a new thing, so we have yet to make an impact on the market."
But don't bother applying if you are an internet start-up. SMEloan.com's target market is established businesses with real revenues and cash flow.
And the word from the government? "Such a new concept should be welcomed by the SME community," says Fung, who has been encouraging change to the financing scenario. "I think banks need to change their financing strategy," he says.
Though he admits that banks are stuck between a rock and a hard place when it comes to financing SMEs, Doyle agrees it is structurally difficult for banks to make small loans.
"Banks are simply making a rational economic decision."
But the knight in shining armour does come at a price. SMEloan.com's interest rates are between 15% and 16%, but there are trade-offs. And judging by the amount of interest SMEloan.com has generated, SMEs think it's worth it.
