One of the most challenging barriers to growth for small and medium-sized enterprises (SMEs) is timely and adequate access to bank finance across the world, more so in the GCC. There are many issues which prevent this free flow of finance.
This is the first in a series of articles which will provide some insights to SME owners, by which they can take steps to prepare themselves better for financing.
Banks lend based on information — mainly from the borrower and other sources. Whilst perhaps 75 per cent are reliant on information provided by borrowers, banks always worry about its authenticity. Why?
Well, because they believe that SME owners operate on the single stakeholder principle the man in charge. The interests of the firm and the owner are seen as one, leading to a situation where there is great conflict of interest because, the firm has several stakeholders.
The owner is but one of many, but because he controls the firm and its finances, others' interests are not often protected. The principles that ensure that everyone's interests are protected have been given a fancy name you must have seen often — corporate governance.
Simply put, this involves:
Who controls what the owner does? Is he the sole decision-maker? Are there no checks and balances to ensure he doesn't commit serious errors?
If he does make mistakes because he doesn't listen to anyone - he is solely accountable but many suffer. Is this fair and just?
Who really knows what goes on in the company — the owner does not feel obliged to tell anyone the truth! Who is there to balance the interests of the many stakeholders in the firm?
As a SME owner, you will wonder what this is all about. After all, you started the firm, it's your equity at stake and it's your ideas and hard work. So what is everyone on about? The truth is, you haven't done it alone.
All your stakeholders, including the bank, have helped you along the way and the bank has nightmares about these four issues. And that is what matters if you want financing.
All these issues are defined in management jargon by terms you've seen before — conflict of interest, transparency, separation of ownership and management and control over management. Basically, it's all about ensuring the owner acts less like a dictator and more like a democrat and looks after everyone's interests.
A survey done in the UAE reveals that the following are the key worries of SME bankers:
• Decision making in SMEs can be impulsive and erratic — wrong investments can be made.
• Nothing ever comes out about what is going on in the company. There is no disclosure process or requirements. Bankers keep wondering what you are up to.
• Diversion of funds: Money the banks lend your firm can end up being used for something totally different to the intended purpose. And no one will ever know.
So there you have it. If you want to grow, you will need more capital — either equity or debt. In either case you need to make the capital provider comfortable, by creating a framework of checks and balances (against yourself) where opinions are expressed and respected and the truth is told.
Remember, you can only fool some of the people all the time and all the people some of the time. Everybody (including bankers) knows that borrowers stretch the truth or not tell the full truth, in the interests of preventing panic, especially if there are temporary troubles in the firm.
The writer is a director at Salvus Capital based in Dubai.
