Stern urges SMEs to seek other sources of funding

Minister of State in the Ministry of Industry, Investment and Commerce, Michael Stern, is urging the small business sector to explore alternatives source of funding other than from the commercial banks.

Stern made the suggestion while addressing the small business conference at The Wyndham hotel, in New Kingston, on Wednesday.

Stern pointed to venture capital firms and factory companies as such sources of funding.

"Today, with most lending to small-scale enterprises being security-based, without any regard for potential cash flow, a whole range of alternative small-business financing arrangements is being explored across the globe," he urged.

Stern's advice for alternative sources of financing came against the background of the difficulties that small- and medium-sized enterprises (SMEs) said they were having accessing funding from commercial banks.

He said, also, that leasing, provides a solution to the financing of machinery, land and equipment for SMEs.

Stern said the benefits of this arrangement was that lease arrangements function in places where capital markets are less developed. He pointed out that leased asset is the collateral for the loan, therefore, security arrangements are simpler.

Venture capital

"For years, we have also seen the need for venture capital firms in Jamaica. We need to again examine this option in a very serious way. Venture capital firms offer capital in exchange for equity in a company," he said, pointing out that this was especially suitable for new businesses, since venture capital firms focus mainly on the future prospects of a company, while banks use past performance as a primary criterion.

The state minister noted, too, that asset-based lending is becoming increasingly popular as a means of financing growth and providing working capital.

Under this arrangement, he explained, a lender accepts as collateral, the assets or accounts receivables of a company, in exchange for a loan.

Another asset-based lending approach, that he said was a good option to explore for small businesses, was floor planning, where companies can finance their inventories.

He outlined that in floor planning, inventory is financed based on the credit of the vendor as well as the company receiving the financing. The inventory purchased acts as collateral until the sale is made.