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Sme Financing International Best Practices
 

Sme Financing International Best Practices

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    Sme Financing International Best Practices Sme Financing International Best Practices Presentation Transcript

    • SME Financing International Best Practices
    • Fundamental Considerations
      • Appreciation of the Importance of SMEs
        • Technology – Based
        • Traditional
      • Cultural and Economic Factors of Society
      • Supportive Legal/Regulatory Framework
      • Access to borrowings
      • Equity:
        • Government
        • Non-government foreign and domestic
    • Importance of SMEs
      • To the Economy
        • Job creation
        • Innovation
      • To Society
        • Management
        • Ownership
      • To Individuals
        • Wealth Creation
        • Accomplishment
    • Cultural and Economics Factors
      • Entrepreneurship
      • Support of family and friends
      • Competitive advantages
      • Education
      • Government programs of support
      • Relationship to large companies
    • Legal and Regulatory Environment
      • Law allows formation of a new company
      • Number of regulatory approvals
      • Time & difficulty of required approvals
      • Honesty & transparency of regulation
      • Sickness & closure of companies
    • Legal and Regulatory – Best Practices
      • Basic Principles:
        • Simply the formation of company and investment funds by eliminating barriers & regulations
        • Require disclosure to parties
        • Protect the interest of stakeholders with general laws
      • Laws to Protect Stakeholders
      • For Example:
        • Workers protected by general labor laws.
        • Investors protected by laws establishing rights and enforcement
        • Customers and suppliers protected by contract laws
        • Environment protected by law
    • Legal and Regulatory – Best Practices
      • Access to Financing
        • Borrowing
        • Equity Financing
        • Venture Capital
      • Current Sources of Borrowings
        • Banks
        • Informal Lenders
    • Legal and Regulatory – Best Practices
      • Best Practices Government Support
        • To encourage bank lending to technology-based SMEs, form credit guarantee companies
        • Loan guarantees to be made available to businesses that are not high tech
        • Each credit guaranty company operates independently
      • Best Practices for Credit Support International best practice suggests desirability of
        • Uniform and consistent practices
        • Common credit standards and regulations
        • Central re-guaranty program as incentive
        • Marketing and promotion
        • Need for training of guaranty personnel
        • Risk management and central data base
        • Lenders who are not banks
      • Loan Related Facilities
        • To support a lending program, a Credit Rating System should be developed
        • A secondary market for the guaranteed portion of loans would be helpful
        • A micro credit program could serve small startup companies with very small loans
    • Legal and Regulatory – Best Practices
      • Increasing Availability of Equity
      •   Equity currently available from:
        • Friends and family
        • Foreign investors
        • Government-funded venture capital funds (primarily for high tech companies)
      • Almost no domestic private equity invested
      • Reasons for Equity Shortage
      • Equity investors seek highest return consistent with the risk of the investment
      • SME investments are difficult to evaluate
      • SME investments take time to mature
      • They are often difficult to liquidate
      • In China, major institutional investors (pension funds and insurance companies) are not allowed to invest in private SMEs
    • Equity International Best Practice
      • To encourage investment in SMEs, most countries have programs that either:
        • Increase potential returns to investors or
        • Reduce risk of loss
      • A pilot program could test the potential for attracting equity
    • Equity International Best Practice
      • Importance of Training
        • In both credit guarantee companies and equity investment funds, management training is needed, and is not available.
        • New materials and courses must be developed and offered to fulfill this need.
      • Recommendations (1)
        • Current programs should be available to high-growth traditional businesses as well as technology-based companies
        • Credit can be increased by a combination of training, consistency of operation through an association of guaranty companies, and establishment of a national credit re guaranty Company by the central government.
      • Recommendations (2)
        • Non-government sources of equity financing can be attracted by a pilot program in which government would improve the profit opportunity or reduce risk of loss to private investors.
    • Equity International Best Practice
      • Recommendations (3)
        • Laws and regulations should be modified to encourage financing:
        • The Company Law still inhibits financings
        • The Investment Funds Law is required if domestic funds are to be a attractive as foreign funds
        • Laws and financial institutions should be changed to make it easier for an investor to sell its investment as the company develops.
      • Recommendations (4)
      • Training programs are required in all aspects of SME Finance:
        • Training of loan officers
        • Training of loan guarantee officials
        • Training of investment fund managers
        • Training of entrepreneurs
      • Recommendations (5)
        • Our recommendations will be described in more detail later in the Forum
    • Government Support for SME Equity Financing- International Best Practice
      • Objectives
      •   To increase availability of equity for SMEs by attracting non-governmental sources
      • To target investments in high-growth, high potential businesses
      • To create investment funds that will be profitable and self-sustaining,
      • To provide experience to investors and fund managers
      • Why is Government Support Needed ?
      •   Investing is a truly global business, so an investment in China must compete with all other investment possibilities
      • Investors seek the highest risk-adjusted rate of profit on their investment
      • SME investments are risky and take along time to mature
      • These investments are unmarketable
    • Government Support for SME Equity Financing- International Best Practice
      • Why is Government Support Needed ?
      • Investing is a truly global business, so an investment in China must compete with all other investment possibilities
      • Investors seek the highest risk-adjusted rate of profit on their investment
      • SME investments are risky and take along time to mature
      • These investments are unmarketable
      • Aims of Government Support
      • Government programs change the risk-adjusted potential profit by:
        • Increasing the profit to the investors, or
        • Reducing their risk of loss
      • What Can Government Do?
      • To provide additional venture capital Government can either:
      • Invest its own money in venture capital investments (directly or through funds) or
      • Support public-private partnership to encourage private investment
    • Government Support for SME Equity Financing- International Best Practice
      • Tools of Government Support
      • Government increases return or reduces risk
      • Direct participation in investment funds
      • Tax credits
      • Loans or loan guarantees to investment funds
      • Leveraged equity participation
      • Guarantees against loss
    • Government Support for SME Equity Financing- International Best Practice
      • Public-Private Partnerships
        • The oldest, largest, and most successful support programs, including U.S., Israel and Australia, are partnerships between:
        • Government
        • Private Investors
        • Private Funds Manager
      • Role of Each Partner
        • Government targets size or sector of investment, and agrees to take low rate of return on its participation
        • Private investors invest with potential for increased rate of return or reduced risk
        • Private managers invest professionally, with motivation of carried interest in fund profits
    • Structure of the SME Equity Program State Guarantee of Loan Investors Equity & Loan SME Equity Fund Fund Manager S S S S S
    • Some Examples
      • Israel Yozma Funds:
        • Government put up 40%
        • Private investors put up 60%
        • Private Fund Managers
        • During first 5 years, Private Investors could purchase Govt. investment at cost plus government – rate interest
      • Australian Innovation Investment Funds:
        • Government invests 2/3 of Funds Capital
        • Private Investors invest 1/3
        • Private Fund Managers
        • Cash distributions to Govt. and private investors in proportion to investment until all investment repaid with govt-rate interest
        • Therefore, govt takes only 10% of profit distributions
    • U.S. SBIC Program
      • SBIC Program active since 1959
      • Government provides 2/3 of capital, private investors 1/3
      • Government seeks only a low return
      • Privately managed
      • Two programs:
        • Debenture Financing
        • Equity (“Participating Security”)
      • Over $5 billion invested by SBICs in 2000
      • Nearly half of all investments by organized venture capital organizations in the U.S.
    • Recommended Pilot Program
      • To test whether a government support program would attract non-government sources of equity, we recommend:
      • Government to offer discount loans to five new investment funds:
        • Loans two times non-government investment
        • One times government investment
      • Regulations based on the Australian and American programs
      • Investments must be direct into SMEs, either high-tech or traditional
      • Program administered by SETC
      • Government loans from the Development Funds proposed in new legislation
      • Government to loan or guarantee loans
    • Structure of the SME Equity Program State Discount Loan Investors SME Equity Fund Fund Manager S S S S S
    • SME Equity Program for Reduced Risk State Guarantee of Loan Investors Equity & Loan SME Equity Fund Fund Manager S S S S S
    • Potential Investors
      • Municipal and Provincial Governments
      • Large companies
      • Pension funds
      • Banks and insurance companies
      • Foreign investors
      • Wealthy individuals