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Expert Talk: How to manage cash flow more efficiently? (Part 3)
In our last discussion with Ms. Hoang Anh, Ph.D Finance from the University of Exeter (UK), UOB Vietnam experts ask her some of the most important questions that every SME should consider regarding cash flow management.
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 VND 2 billion, consisting of owners' equity solely. Without any capital loan, here is the company’s income statement:
| Revenue | 1,000,000,000 |
| Expense | 600,000,000 |
| Pre-tax Income | 400,000,000 |
| Corporate Income Tax (20%) | 80,000,000 |
| After-tax Income | 320,000,000 |
| Return On Equity Owners' Equity = 2 bil |
16% |
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:
| Revenue | 1,000,000,000 |
| Expense | 600,000,000 |
| Earnings before interested and taxes | 400,000,000 |
| Interest | 100,000,000 |
| Pre-tax Income | 300,000,000 |
| Corporate Income Tax (20%) | 60,000,000 |
| After-tax Income | 240,000,000 |
| Return On Equity Owners' Equity = 2 bil |
24% |
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.
On the other hand, SMEs should be aware of unfortunate scenarios, for example, when their businesses don’t go well as planned, they still have to pay off capital and interest. Current economic status is also a significant factor in getting your application approved since turbulent economic conditions may lead to some restraint in lending terms and policy. In order to raise working capital from a bank, some SMEs put up their assets as collateral. However, the lender is allowed to re-assess the current market value of your collateral and review their credit package along the way. They may ask borrowers to inject more cash or property to maintain the financial assistance.
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.
- 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, options 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 Vietnam 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 Vietnam 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 Vietnam once again for giving me a chance to share my thoughts with your readers.
Comment
Bui Thu Hue, Deputy Head
The fact that many SMEs do not use borrowed capital for the right purpose, it leads to overdue payments and will be more difficult to access to capital in future.Trinh Van Binh, Director
Ms. Hoang Anh's sharing is fairly useful for me on using borrowed capital from banks to reduce corporate tax.Nguyen Quynh Chi, Vice Director
I am the manager of a plastic manufacturing enterprise, and I also see that SMEs have quite a lot of difficulties in borrowing capital from the banks. I hope UOB can offer me the suitable loan for SMEs like us.
