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A Report on the Review of the SME Funding Schemes
Chapter 2
SME Business Installations and Equipment Loan Guarantee Scheme
2.1 The BIG came into operation in mid December 2001. By providing Government guarantee to SMEs, the BIG helps individual SMEs secure loans from participating lending institutions to acquire new or second-hand business installations and equipment. The maximum amount of Government guarantee for an SME is $1 million or 50% of the approved loans, whichever is the less. The guarantee period is three years. The objective of the scheme is to help SMEs enhance productivity and competitiveness.
2.2 As at end October 2002, about 2 700 applications were approved. The amount of Government guarantee involved was about $960 million, and the amount of loans provided by the participating lending institutions was about $2.2 billion. About 1 990 SMEs have so far benefited from the scheme. Detailed statistics are at Annex 1 (pdf format).
Recommendations
Government to provide guarantee for working capital loans
2.3 The Committee notes that the economy of Hong Kong has not recovered as fast as the Committee has assumed in June 2001, when it submitted the report on SME support to the CE. The September 11 incident has further aggravated the situation. At present, many local SMEs are suffering from insufficient orders, reduction in trade volume, and prolonged credit term for buyers. All these have in turn created cash flow problems for SMEs. At the same time, the prevailing economic climate has made it difficult for SMEs to obtain loans from lending institutions to meet their operational needs. The Committee has therefore come to the view that, in addition to providing SMEs with business installations and equipment loan guarantee, the Government should also consider providing SMEs with guarantee for working capital loans.
2.4 The Committee further considers that, when providing SMEs with working capital loan guarantee and business installations and equipment loan guarantee, the Government should continue to follow the fundamental principle of helping only enterprises which have the potential and prospects to further grow and develop. On this premise, the Committee recommends that the Government provide guarantee to SMEs through the following two means:
| Recommendation 1: |
To provide SMEs with two types of guarantee when they purchase business installations and equipment, namely a business installations and equipment loan guarantee and a conditional working capital loan guarantee. The provision of the latter would be conditional on the provision of the former. The objective is to help SMEs which want to purchase business installations and equipment secure loans for, respectively, purchasing installations and equipment, and working capital. |
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The Committee reckons that SMEs which require installations and equipment financing may also require working capital financing, as the two needs are often inter-related. This is because as SMEs add equipment or upgrade existing ones to enhance productivity, their operating expenses will often increase correspondingly. |
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Under the present economic climate, SMEs may have hesitation in investing in business installations and equipment, even though they have practical need to buy new ones or replace existing ones. Concerns about the future cash flow position of their companies may discourage SMEs from making long-term investment. The Committee considers that if the Government could, in addition to providing guarantee for installations and equipment loans, provide guarantee for SMEs to secure working capital loans from lending institutions, it would further encourage and help SMEs upgrade their installations and equipment. |
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On ground of equity, the Committee proposes that, should the Government accept this recommendation, SMEs which have already obtained Government guarantee for installations and equipment loans prior to this recommendation coming into effect should also be eligible for the conditional working capital loan guarantee, provided that the lending institutions concerned are willing to provide working capital loans to the SMEs. | |
| Recommendation 2: |
To provide SMEs with guarantee for loans based on accounts receivable. All SMEs should be eligible for the guarantee, regardless of whether they are recipients of the conditional working capital loan guarantee. |
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The Committee is aware that SMEs in general do not have too much cash in hand. As they extend credit to buyers, their liquidity would be further tightened. To ease their cash flow problem, the Committee considers that SMEs should be encouraged to make use of accounts receivable to obtain short-term working capital loans from lending institutions. At present, not many local lending institutions are providing accounts receivable financing to SMEs. Compared with other forms of working capital financing, the risk of accounts receivable financing is more manageable. This is because unless the buyers are unable to pay due to financial difficulties, or unless they refuse to pay due to business dispute, it can be quite safely expected that payments on accounts receivable would materialise on or before a given date. The Committee believes that if the Government provides guarantee on loans based on accounts receivable, lending institutions would be more willing to provide accounts receivable financing to SMEs. | |
Guarantee amount
| Recommendation 3: |
To increase the maximum amount of business installations and equipment loan guarantee for an SME from $1 million to $2 million. (However, the existing condition that the amount of guarantee will not exceed 50% of the loans approved by lending institutions will still apply.) |
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The Committee is of the view that SMEs should be encouraged to make use of the scheme to acquire more advanced installations and equipment, with a view to enhancing productivity and competitiveness. As the purchase of advanced installations and equipment involves higher investment, the Committee recommends that the maximum amount of guarantee for business installations and equipment loans be increased to $2 million. | |
| Recommendation 4: |
The amount of guarantee for the conditional working capital loan should not exceed 50% of the guarantee an SME would obtain for business installations and equipment loan, viz $1 million or 50% of the conditional working capital loan approved by lending institution (whichever is the less). |
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For example, if an SME receives $2 million Government guarantee for business installations and equipment loans, and at the same time secures another working capital loan from the same lending institution, the Government may provide working capital loan guarantee up to $1 million to that SME. The actual amount of guarantee would depend on the amount of working capital loan approved by the lending institution. | |
| Recommendation 5: |
The maximum amount of guarantee for loans based on accounts receivable an SME may receive should be $1 million or 50% of the loans approved by lending institutions (whichever is the less). |
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The Committee considers that this arrangement could address the cash flow needs of SMEs when extending credit to buyers. It provides a financing channel for SMEs which do not procure installations and equipment and therefore cannot benefit from the conditional working capital loan guarantee (see recommendation 4). | |
Guarantee Period
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Recommendation 6: |
To extend the guarantee period for business installations and equipment loans from three years to five years. |
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The Committee is of the view that, in tandem with an increase in the maximum amount of guarantee for business installations and equipment loans (see recommendation 3), the Government should also extend the guarantee period. This would help relieve SMEs' repayment burden. | |
| Recommendation 7: |
The guarantee period for the conditional working capital loans, and for loans based on accounts receivable, should be two years at the maximum. |
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As working capital loan is of short-term nature, the Committee considers that a two year guarantee period would be sufficient. | |
2.5 In sum, the implications of the aforementioned seven recommendations are as thus. An SME which wants to purchase business installations and equipment, and has accounts receivable in hand, may obtain up to $4 million guarantee from the Government ($2 million for business installations and equipment loans, $1 million for conditional working capital loans, and another $1 million for loans based on accounts receivable). With the $4 million guarantee, the SME may raise loans of not less than $8 million from lending institutions, for purchasing business installations and equipment ($4 million) and for working capital ($4 million).
2.6 SMEs which do not purchase business installations and equipment may, provided that they have accounts receivable in hand, obtain up to $1 million Government guarantee for loans based on accounts receivable. This maximum amount of guarantee would enable them to raise loans of not less than $2 million from lending institutions to improve cash flow.
Chapter 3 : SME Export Marketing Fund
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