Scott and Wang (2006) state that there are several sources of finance available for SMEs in China. However, types of finance that are both available and obtainable differ for SMEs in different life cycle of the enterprises. They mentioned the following sources of finance available for SMEs in China:
1. Personal savings
This form of financing is usually preferred if it is available as it does not require any interest payments in a fixed nature. Therefore, due to difficulties in finding and obtaining loan at the start-up stage, most owners of the small enterprises usually invest their own savings.
2. Loan from immediate friends and relatives
This is another source of finance for SMEs in China as majority SMEs are organized and opened with the help of this type of financing. Due to strong family culture in China, the access to this type of financing is easier than it can be found in EU or theUS.
3. Trade credits
Zhuo (2001) stated that trade credits is one of the financing sources for SMEs in China as it gives them the privilege of paying back to their suppliers later. This is also considered to be a good form of financing methods as small and medium sized enterprises usually struggle with cash at the early stage of their business operations. However, getting a trade credit also requires SMEs to provide healthy and strong cash flow statements, where in many cases it is impossible.
4. Bank loans
Banks loans are crucial sources if financing any business in most countries due to the length and lower interest rates than the equity. However, obtaining a bank loan is another obstacle in financing SMEs in China. This is due to the fact that most of the banks are state-owned commercial banks that hold most of the deposits and lending power in the country. Therefore, due to their relatively large and monopoly position, commercial banks usually prefer to lend money to large and listed companies as they are less risky than SMEs in terms defaulting the interest payments.
Moreover, commercial banks usually offer excessively large amounts of loan that is much more than the needs of SMEs, therefore, they are less interested in issuing loan to SMEs due to economies of scale.
Furthermore, the credit ratings required to obtain a loan from these banks are really high, and in most cases SMEs credit ratings do not meet these high ratings requirements by state-owned banks (Fontes, 2005).
However, as mentioned by Wu and Song (2008), SMEs can access to different sources of finance based on their business life cycle. They further state that key financial resources for the start-ups are usually their personal savings or money borrowed from their immediate family and friends. This finding has been consistent with the western counties too as the findings of Bank of England (2003) data suggests that 60% of business owners used their personal savings as an initial source of finance. This is also compared to the findings of Research Commission of Chinese Private Business (2002) where the report identified that 65.5% of capital used to start the new business is originated from personal savings, 21% from bank loans and the remaining are originated from other sources of finance available to SMEs.
Small and Medium sized business financing in China
After the China constitution has found the private sector to be important part of the economy y the end of 1990, the government has gradually started lifting the barriers on the development of SMEs so that small businesses could develop quickly to add more value to the economic growth of the country (Chen, 2006).
Podpiera (2006) stated that instead of rewarding SMEs in China, there is discrimination against in terms of access to external funding, historical political pecking order and underdeveloped capital markets which could have allocated financial resources to the least efficient small businesses rather than most efficient private firms.
Even though 3.3 million registered private companies which contributed to more than half of the GDP in China which employed 47.1 million people in 2004 received only 10% of all banks loans (Wu and Song, 2008).
Cousin (2007) mentioned the sources of finance for all types of business, including for SMEs in China. He stated that the main sources of finance which are the banks are made up of 4 big SOCBs, 3 policy banks, 13 joint-stock commercial banks, 115 city commercial banks, 30,438 rural credit cooperatives and some other foreign banks.
OECD (2005) mentioned that the government directly and indirectly holds between 95-99% of the all banking deposits and assets. Due to close links between the government and banks, the government usually supports the banks by giving them a lot more freedom to operate, however, the influence of the government in the banking industry is still huge.
Wu and Song (2008) considered three aspects that affect on the financing of SMEs which are the government intervention or interference, the historical relationship between SMEs and the state-owned banks and the financial market environment. They stated that the interference by the government is usually carried out through scrutinizing banks to have very strict checks and ratings when issuing loans to private sector companies or firms as the government does not want the firms to default on their payments.
Moreover, the historical relationship between SMEs and the state-owned banks always have been negative, as the state-owned banks always restricted the ways of issuing loans to the SMEs considering them as risky businesses that may not pay as much interest payments to the banks as other large or listed companies due to their relatively small size.
The financial and capital markets as mentioned by Wu and Song (2008) is another aspect that affects the financing of SMEs in China due to lack of sufficient funds available in the financial market, lack of risk management practices, too high liquidity levels required by available lenders or selective nature of the lenders as most of them only accept very limited fixed assets such as land and building when issuing a loan.
- Chen, J. (2006), “Development of Chinese Small and Medium-sized enterprises”, Journal of Small Business and Enterprise Development, Vol.13
- Organisation for Economic Cooperation and Development (OECD) (2005), China OECD Economic Survey (2005)/13, Sept
- SCOTT David and WANG Jun, (2006), Developments and Prospects for Rural Finance in China, Washington, World Bank