China suppliers want to take advantage of the better export environment, but investment gaps are delaying capacity and capability upgrades. Some makers turn to friends and family for loans instead.
The improving global economy and export situation in China are encouraging many companies to boost investment in capability expansion and product development. Small and midsize makers, however, are finding it difficult to obtain substantial funding needed to carry out such plans.
At the height of the 2009 financial downturn, many small and midsize suppliers scaled down their operations to cut costs and stay afloat. Shenzhen Huacun Textile Co. Ltd, for instance, closed some of its factories outside Guangdong province. Now that the company wants to set up new textile production facilities, it is unable to do so due to insufficient capital. Manager Jiang Jianhua said two-thirds of the investment still needs to be raised.
Firefly Lighting Co. Ltd, meanwhile, wants to expand its market share in developed countries, including France, Italy and the US. But to do this, the company needs to ramp up R&D and promotional activities. Sales manager Dang Danping said between $500,000 and $800,000 is still needed for hiring additional R&D staff, applying for patents, exhibiting at overseas trade shows and building websites.
Applying for a business loan to fill the investment gap is an obvious solution, but SMEs have found borrowing from banks has become more difficult than in previous years. After raising the one-year lending rate twice in 2010, the People's Bank of China lifted it again in February 2011 to 6.06 percent. Consequently, banks have become more prudent about the loans they grant, making it more difficult for SMEs to receive financing.
Central and local governments have set out various policies to help small and midsize businesses raise sufficient capital, but challenges remain.
For instance, companies looking to boost capacity are encouraged to take out a finance lease. This way, they would be able to use new equipment without having to shell out a large sum of money in one go.
For suppliers experiencing cash flow difficulties, the government can delay collection of workers' social insurance for a designated time frame, even for up to a year. Fees could be reduced as well.
But such policies are often not enough for SMEs to raise sufficient capital. Some suppliers still borrow money from relatives, friends and nongovernment loan markets.
Ninghai Sanhe Arts And Crafts Co. Ltd general manager Yang Qian said funding to double the supplier's 100sqm workshop came partly from loans from friends and relatives. The company is one of many small factories in Ningbo, Zhejiang province, that have difficulties obtaining bank loans.
Banks have always been more reluctant to grant loans to SMEs. Compared with large businesses, smaller companies have a higher operational risk. The annual sales revenue of a small OEM maker of jeans, for example, may be largely dependent on export orders from one or two buyers. When a client stops transacting with the company, the latter could face serious financial strain that may force closures.
This was something that happened frequently at the height of the financial downturn. Back then, many buyers also requested payment extensions, which exacerbated small and midsize suppliers' anxiety over their cash flow.
Larger makers do not have this concern as their revenue sources are spread across several export buyers and businesses. They are more liquid as well, and can handle cancellations and delayed payments better.
Moreover, most SMEs have a lower credit rating and insufficient mortgage loan assets, factors that exacerbate funding difficulties.
SMEs account for more than 90 percent of total businesses in China and contribute about 70 percent to the country's export sales. Such companies also provide at least 80 percent of the jobs at towns and cities.
Note: This article "Insufficient funds derail SMEs' expansion plans" was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.
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