Expert Talk: How to manage cash flow more efficiently? (Part 3)

Could you please tell us more about the advantages of raising working capital via bank loans for SMEs?

There are numerous obstacles standing in the way of SMEs when trying to develop their business. They often struggle to make a breakthrough in the market and fail to obtain bank credits or attract human resources due to their small-sized operations. Various studies point out that difficulties in accessing loans is the biggest roadblock for SMEs when it comes to boosting their scale and productivity, acquiring marketshare and forging more job opportunities.

Utilising financial assistance from banks can also reduce the pressure of corporate income tax while increasing the profitability of your business. Let’s take this simple case as an example: Total assets of company are worth VND2 billion, consisting of owners' equity solely. Without any capital loan, here is the company’s income statement:

Given that the owner only invests in 50% of owners' equity and applies for a loan at 10% per annum interest rate, the business statement will be adjusted accordingly:

As a result of debt and tax abatement for interest expenses, the amount of corporate income tax is decreased to VND 60 million. It proves that a loan can be beneficial to your business in many ways. Moreover, despite the fact that after-tax income is lower, the return on equity is 24%, which definitely wins over the ratio of 16% when we do not leverage external support.

   
What is your advice for SMEs to minimise the risks of bank credits?

In the past, access to mortgage finance was extremely tough for SMEs due to a variety of internal limitations, such as, a lack of transparency and creditability in financial reports, their poor experience in managing cash flow, etc. Aside from that, the size of a business also affects financial institutions' lending decisions as small enterprises are likely to be incapable of putting up assets as collateral, and their loan amount and credit score are pretty low when considering high operation costs and risks. Nevertheless, recently commercial banks have paid more attention to SMEs and started to offer a broader selection in customised loans for SMEs. It’s clear that SME business lending is undoubtedly an ongoing trend in commercial banking.

Even though the door to bank credits has become more open these days, not every loan application is accepted as commercial banks have their own concerns. It’s estimated that 90% of startups fail, which makes it risky for lenders. Next to SMEs’ insufficiency in collateral, it’s very challenging to gather information and all of the required documents from them. To overcome this barrier, SMEs need to be willing to collaborate with their bank as well as carefully prepare all required paperwork. Should they do so, it’s a win-win situation.

 
In conclusion, here are my recommendations on how to reduce the threats of leveraging bank credits and manage your debts wisely: 

• Keep your eye on cash inflows and outflows to secure your repayment capability.
• Make good use of your loans./span>
• Don’t try to seek financial support from many sources as you might loose track of them.
• Build a good relationship with your bank to be offered more beneficial services, op-tions or conditions.
• Leverage your bank’s consulting services. To ensure that a loan can be paid off, banks usually provide business, finance and process consultation to businesses.

Thank you for your informative and passionate consultation. UOB believes that all of this insight and advice would be very valuable for our readers looking to better understand the landscape of corporate financial management in general and cash flow management in particular.

Regarding this topic, I am planning with UOB to host a special seminar, which I believe would be a great opportunity for SME owners to gain more insights into cash flow management and knowledge of administration tools. Thank you UOB once again for giving me a chance to share my thoughts with your readers.

Should you have further questions related to UOB’s business financial assistance, please feel free to leave a comment below. UOB experts will be in touch at the earliest opportunity.