Specificities of bank lending to SME

Date: 2015-10-07; view: 745.

There are a number of features relating to commercial banks which lend to small and medium-sized businesses:

1. A high degree of risk. But according to some experts this is probably became a stereotype. Although small and medium-sized businesses and have their own problems and peculiarities the risk of lending to small and medium-sized businesses associated with the failure to provide accurate information for example is not as high as the risk of consumer lending, where loans are granted to individuals upon provision with personal data of a passport and a very Limited information about the place of work, income, etc. In addition, according to statistics small and medium-sized enterprises are quite disciplined borrowers.

2. The collateral. In most cases, banks prefer to take property and equipment as collateral, as well as take it in the form of commodity that means material assets. Some banks also require mandatory guarantee from the third parties. But sometimes potential borrowers do not have the collateral which is able to meet the banks requirements. That's why very often they can't get loans from banks.

3. To improve the reliability of the loan, banks often require such conditions as share of the borrower in the project. This share should be at least 30% of the total.

4. It is often required from the organization to maintain a certain minimum balance of funds in the account.

5. Terms of the loan. The huge parts of loans granted to SMEs are short-term. But at the same time short-term lending prevents the stabilization of business, because some projects implemented by small and medium-sized businesses require long periods of implementation, ie. more than one year.

6. Interest rates. Due to the risks associated with lending to SMEs, banks often set high interest rates on loans. That becomes an obstacle for small and medium-sized companies when trying to obtain credit.

Thus banks should take into account all special features of SMEs and make up credit policy with regard of these features.