While the impact of the pandemic continues to hurt business worldwide, there might be light at the end of the tunnel for Malaysian Small Medium Entreprises (SMEs).
Various initiatives introduced by the government has helped many businesses to stay afloat.
This can be seen from initiatives such as the wage subsidy programme (WSP), with an approved amount of RM12.225 billion as of Nov 6, which benefitted more than 2.64 million employees and more than 322,177 employers.
With the application for the second phase of WSP open until Dec 31, we can assume the programme will continue to help SMEs remain resilient in the market.
However, despite the threat posed by the pandemic, opportunities are also there for the taking.
Government initiatives, if fully taken advantage can turn the table around not only for already established businesses, but also for those who have just started planning to venture into entrepreneurship.
But the main dilemma they face, especially by SMEs in the current situation, would be the choice of financing.
Pecking order theory suggests a preference order as the method of financing chosen by businesses, starting with internal financing, debt, and equity as the last choice. It is based on the cost associated with each financing method.
In order to fulfill the criteria as SMEs in Malaysia, a business must fulfill three conditions namely, qualifying criteria, types of establishment and shareholding structure.
The six-month moratorium introduced earlier to ease the financial burden of people can be used by those who are able to save the money, which initially would be used for their monthly commitments, as a start-up capital for their business.
Their decisions based on this reflects in the first pecking order, which is internal financing. It is the safest and has the lowest risks for an individual who wishes to start a business.
For an already established business, the savings that may be derived from the loan moratorium, or savings generated from reduced expenses such as in rental expenses, might be used to further expand their operation.
However, with the uncertainty surrounding the business environment, transactional and precautionary will be the main motives for holding cash rather than speculative for both parties.
The choosing of debt as the main source of financing currently seems more attractive.
This was due to the financing facilities offered by banks in response to the overnight policy rate (OPR) announced by Bank Negara Malaysia, where the rate announced by the latter currently stands at 1.75%.
The adjustment on interest rate of the current facility due to lower OPR can also provide additional room for a new financing. With the borrowing cost becoming cheaper, businesses will be more influenced to borrow and, eventually, help keep economic activities running.
Nevertheless, before any financing agreement is inked, businesses need to know whether they can serve their commitment should the interest rate jump to a ceiling rate, and also take into consideration whether they can achieve minimum sales to avoid financial distress. Heavy reliance on debts with a significant drop in sales, proves to be disastrous for various industries, as seen globally.
Although equity financing falls last in the pecking order, the application is different with SMEs in terms of the concept of asymmetric information and concentrated ownership.
In addition, the fee incurred by a public listed company for equity financing is higher compared with a private company.
Private companies in Malaysia are prohibited from offering shares or debentures or inviting the public to deposit money with them.
As such, equity capital usually comes from the owner, family, or friends in consideration of the company’s shares.
This fund normally comes from lifelong savings or personal loans of these parties for the purpose of setting up or investing into the business.
But what happens if the business is unable to sustain? The shareholders that used their savings will surely lose their investment. Imagine the state of mind when your entire savings is lost in a blink of an eye.
The impact to those who obtained personal loans will be more severe as they still need to make their monthly commitments for a business that provides no return.
Therefore, a thorough assessment needs to be implemented before any financing decision is made.
As reported, 2,713 SMEs have closed shop due to the pandemic. The decision to enter the market, or expand, becomes more difficult.
With various channels available for financing, it also brings a dilemma on the types of financing to chose from.
Despite the facilities available, it is not guaranteed the financing facility will be granted as creditworthiness of the applicant still needs to be scrutinised.
As such, other alternative methods of financing such as equity crowdfunding and peer-to-peer financing are something that need to be considered by SMEs.
Fadhirul Hisham Aziz is a corporate administration lecturer in Faculty of Administrative Science and Policy Studies, UITM Seremban Negri Sembilan. Comments: letters@thesundaily.com
