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| Customers seek consulting for their borrowing at Prudential Finance in HCM City |
Small- and medium-sized enterprises (SMEs) are regarded as the backbone of the economy, accounting for 97% of the 470,000 registered businesses. Over the years, they have played an increasingly significant role in the economy, contributing to the GDP and generating employment.
Vietnam’s SMEs are presently very much in need of capital to expand their operations and profits. However, they are facing tremendous difficulties in gaining sufficient access to finance, the most important obstacle to their growth.
Vu Cong Hoa, head of Phuong Nam Packaging and Mechanical Engineering Cooperative in HCM City, is struggling to find funds to continue the project that is two-thirds complete. His business, which is conducting a study on creating a waste processing line to turn garbage into organic fertilizers, has not generated any revenue since the beginning of the year. Up to now, 70% of the work done has resulted in various types of machinery lying in heaps in the cooperative’s warehouse.
Unable to raise sufficient capital from cooperative members as well as failing to obtain bank loans, Hoa has resorted to every credit fund but to no avail. He has yet to know how to overcome the capital shortage in the future.
Hoa’s dilemma is typical for many local SMEs which are thirsty for investment capital and have no idea how to quench their thirst. Inadequate access to finance remains a great concern for SMEs despite numerous Government moves and banks’ efforts. On the one hand, SMEs can articulately present to banks all their difficulties in terms of capital, technology renovation, facility construction and investment. On the other hand, banks frequently face problems in evaluating loan applications from enterprises.
Indeed, experts have pointed out two major issues among others that are borrowers’ financial statement and collateral. Financial reports of businesses are deemed to be unreliable and lack transparency. Some businesses may maintain two to three different accounting records on their operation: A financial report which often declares loss aiming at evading tax; another for internal use that would not be revealed to outsiders; and maybe a third one for shareholders’ review.
Applications for bank loans with a financial statement declaring loss would surely be rejected. Banks would set aside money for credit-worthy SMEs, those with accurate reports, feasible business plans and high possibility for solvency.
Even when banks neglect the misleading financial statement and switch to scrutinizing project feasibility, many businesses still cannot meet this requirement. In many cases, enterprises try to seek short-term loans to finance long-term assets like machinery, equipment and facility construction. Besides, collateral and financial capacity are other hurdles that block businesses from access to bank loans.
Where to turn to for funding
Experts said SMEs can seek loans from credit sources offering long-term loans, finance sources formed under joint ventures, finance leasing companies and credit funds. They can also approach foreign financial institutions that promote projects related to climate change or clean production with minimal impact on the environment. To ensure success, applicants should fully understand the institution’s evaluating criteria. Generally, lenders want a coherent financial statement that has been audited and a profitable business plan.
The first capital source for enterprises came from Government policy. According to Tran Buu Long, vice director of the HCM City Credit Fund, credit policy for SMEs has been implemented through various municipal programs. The large scale program provides the investment stimulus package while smaller programs cover a series of funds for various purposes. There are a fund that revolves the money to facilitate cleaner and greener production for businesses, fund to mitigate environmental pollution, fund to support science and technology development, and fund to assist businesses in building warehouses and transportation infrastructure.
The city’s Science and Technology Development Fund has an initial capital of VND50 billion with non-mortgage interest rate ranging from 0%. Its maximum level is half of that of commercial banks. The fund can provide non-refundable loans for certain projects. Its capital is expected to reach VND200-300 billion by year-end.
The HCM City Finance Investment Company that holds many capital sources of the city is also a potential lender for businesses.
The city’s Credit Guarantee Fund has provided guarantees for businesses to borrow a total of VND400 billion up to now. However, banks have turned down many applicants who have been guaranteed by the fund. Currently, the fund’s balance of about VND277 billion is too modest for the demand of over 200,000 businesses in the city.
Commercial banks are probably best positioned to improve SMEs’ access to finance. Many banks are carrying out promotion programs targeting SMEs considered to be their potential customers. ACB has some projects to aid SMEs; some in collaboration with the Japan Bank for International Cooperation while others linking with projects in the European Union.
Another example is the partnership between the International Finance Corporation and Techcombank in a program worth US$125 million that focuses on supporting local SMEs in renovating technological equipment and saving energy.
SMEs’ journey to seek capital seems to be full of hardships. Yet amid those difficulties, the authority of Long Hau Industrial Park in Can Giuoc District, Long An Province has managed to find a practical solution. Well aware of businesses’ financial woes, the authority of Long Hau has borrowed capital and lent it to businesses operating in their park.
Long Hau Industrial Park has built facilities and workshops for lease or sale to businesses and allow them to pay by monthly installments over a duration as long as 10 years. The park also helps businesses obtain long-term bank loans in cash. Besides, it works on creating funding channels for businesses by collaborating with financial institutions and banks. Long Hau’s efforts have eased businesses’ financial pressure and lured more customers into the park.
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