It might be a cliche to say that cash flow is the lifeblood of any business. As the company grows, the company will require more cash to expand its operations or supply more goods or services to its customers. The latest survey published the Associated Chinese Chambers of Commerce and Industry of Malaysia (ACCCIM) provides an interesting insights on SMEs awareness on alternative fundraisings in Malaysia. You can get a copy of the report here. Here’s what I think about the survey.
First, a caveat. The findings of the survey may not represent all the SMEs in Malaysia (which calls for the relevant agency to do it). However, the survey should still provide a good sampling set in terms of the awareness among SMEs regarding their financing opportunities.
Many SMEs still rely on bank for financings
Findings by the survey on source of financings among SMEs
Apparently, venture financings only represents 6% of the total source of financing. Banks still play a majority role in providing capital followed by fundings from government agencies like SME Bank and SME Corporation.
Regrettably, the report did not mention the reasonings as to why there was such a low rate of venture financing. I would argue that one reason for the lack of venture financing is due to lack of attention on traditional businesses among VCs compared to tech startups which is considered as “more sexy”. Another reason perhaps is due to failure to comply with basic compliance issues.
What can startups do to increase their chances for venture fundings?
As a lawyer, I have worked on advising many VCs in startup investments. Our roles as lawyers are not simply limited on preparing the documentation such as term sheet and the investment agreement but also to carry out due diligence on the startups. Regrettably, many tech startups fail to comply some really basic compliance requirements. Accounting and taxes are not filed in time and no documentary evidence can be provided despite being requested so by the auditor. Funding chances can be severely reduced if the due diligence discovers that the owner of the business takes the profit out of the business. Sometimes, we also found that certain companies do not file their papers to the CCM properly. In this case, the directors may be liable for penalties (and embarrassment from potential funder). The same issue applies for traditional businesses seeking fundraising on crowdfunding platforms.
As a VC, the VC has to achieve a certain return from their investments to their investors based on their specific timeframe. Therefore, it is only right that the VC instruct the lawyers to carry out a stringent due diligence process to ensure that the investment goes to the right company. Similarly, a crowdfunding platform wants high quality companies to be in their platforms so that it can showcase and generate good interest among potential investors.
Is it really the SMEs fault?
Well, not really. There are many good businesses out there that do very well. Some are well run and managed that the business doesn’t need any other external fundings. And yes, while it is convenient to simply blame SMEs for their ignorance on compliance issue, many of them are good entrepreneurs that may be too focused on generating revenues. Also, there are certain costs to comply with the laws such as monthly tax deductions for the staff. As a startup, you should consider outsourcing certain functions which are non-revenue generating like managing payroll and accounting, so that you can focus on more revenue generating stuff like bringing more revenues and businesses to the company.
How can service providers do more?
The lack of awareness among SMEs represents a huge opportunity for service providers like lawyers and accountants to offer their expertise in helping these companies to be “financing ready”. More firms should organise talks to create more awareness among entrepreneurs who may be involved in traditional or even tech based businesses. Similarly, startups should find ways to ask if such service provider may offer a startup package or flexible fee structure to regularise their compliance affairs.
At the same time, the government agencies such as SME Corporation and Teraju should continue doing more in creating awareness among SMEs regarding various financial assistance and grant opportunities which may be available.