MSMEs urged to consider alternative financing options

MSMEs told not to resort to illegal financing as their final option for aid due to ridiculously high-interest rates 


Tunku Danny says it is time for SMEs to consider tapping into ECF and P2P as their alternative financing source

SMALL and medium enterprises (SMEs) or micro-SMEs (MSMEs) should never resort to illegal means of financing should they fail to obtain any financial aid from the banks or the government. 

MSMEs should look at alternative financing sources including crowdfunding and online platforms as illegal financing would be punitive to their business, said industry stakeholders. 

microLEAP founder and CEO Tunku Danny Nasaifuddin Mudzaffar said the access to loans is a major challenge to many MSMEs post-Covid-19 because banks are still cautious when it comes to giving out loans as they don’t want their non-performing loans to spike up. 

“This is evident when a recent study conducted by the Small and Medium Enterprises Association Malaysia shows that 40% of SMEs had their loan applications rejected in the last six months despite the government’s efforts to funnel funds through the banking system via various programmes such as Penjana and Prihatin. 

High Interest Rates by Illegal Financier

“Regardless, it is still cheaper than resorting to illegal financing options such as loan sharks due to the high-interest rate where some will provide a loan to you at a ridiculous 30% per month,” he told The Malaysian Reserve (TMR) when contacted. 

Echoing Tunku Danny’s sentiment, MoneyMap2U director Jym Chee said if at any time MSMEs fail to secure bank loan, they can always consider the alternative financing options that are regulated by the Securities Commission of Malaysia (SC) rather than resorting to illegal option. 

“I don’t encourage SMEs to obtain financing assistance from loan sharks, which is the most typical illegal option that SMEs will reach out to should all their legal options fail, as they will entail very high-interest rates (up to 3%-5% per month). 

“There are numerous banks for MSMEs to apply for a loan. The chances of success for a company in securing a loan for their business operation or survivability is much higher compared to a budding business (or one that is borrowing to cover up a different debt). 

I don’t encourage SMEs to obtain financing assistance from loan sharks as they will entail very high-interest rates, says Chee

“What they might not know is that certain banks might favour certain industries. Researching and finding out which bank works best for their specific use case is crucial in securing loans,” Chee told TMR when contacted. 

Chee added that while there might not be many differences in terms of loans, players in certain industries might find it hard to secure loans as their sectors might be most affected by the recent pandemic. 

“However, most of the banks in Malaysia are reliable and can be trusted for loans,” he said.

At the same time, SME Association of Malaysia national secretary general Chin Chee Seong also urged MSMEs not to resort to any illegal financing means as their final option for financial assistance as most of them will charge a very high and ridiculous interest-rates for their repayment.

“No doubt that it is difficult for SMEs to secure loans from financial institutions because of their poor performance (loss of credentials and lack of collateral) for the past two years as a result of the Covid-19 pandemic. The high financing ratio is making it even more difficult for MSMEs to secure a much-needed-loans. 

“However, MSMEs still should never resort to illegal financing as there are other financial options available,” Chin said. 

Alternative Financing Available for SMEs

Among the alternative financing available that are regulated by the SC are peer-to-peer (P2P) financing, equity crowdfunding (ECF) and security token offerings (STOs). 

According to SC, P2P financing is an online financing platform for MSMEs to raise financing from a group of investors for business or working capital as well as financing of invoices. Via this route, investors provide financing to MSMEs in return for interest payment and repayment of the principal amount. 

ECF, meanwhile, is an online fundraising platform for start-ups or MSMEs to raise early-stage financing from a group of investors. Investors who provide financing to the start-up or MSME via ECF will receive equity or shares from the company and will become one of the shareholders of the company. 

Over time, if the company’s business does well, the investor who is now a shareholder will benefit from either the potential dividend paid out by the company; sale of the shares to new investors or if the company becomes eligible to list on the stock exchange. 

STOs, on the other hand, combine blockchain technology with the needs of regulated securities markets to improve asset liquidity and expanded access to finance. STOs are typically the 

issue of digital tokens in the form of regulated securities in a blockchain ecosystem. 

Time To Tap into Alternative Financing Option

On that note, Tunku Danny said it is time for SMEs to consider tapping into ECF and P2P as their alternative financing source due to their shorter application and processing time. 

“The time taken to receive your financing from both ECF and P2P is much quicker than the three to six months it takes for a bank to approve and process their loan application. 

“The application of the two alternative financing are also very fast as it takes less than a month to apply, as all you need to do is have your investment note published on their platform and you will be fully funded,” he said, while adding that currently, there are 10 ECF and 11 P2P financing operators available with micro-LEAP being one of them. 

Commenting on this, Chee also mentioned that P2P financing, ECF and private equity funding are all among the viable alternatives for MSMEs to secure extra finances. 

“It is also best for the companies who apply for these alternative financing routes to be over three years in operation,” he added. 

On the SME financing ecosystem, BNM revealed that it has implemented various initiatives to enhance the ecosystem — including SME development; financing infrastructure; financing facilitation; avenues to seek information, redress and commercial crisis; debt resolution and management; as well as outreach and awareness programmes. 

As of July 2022, the central bank stated that there were RM371 billion outstanding of SME financing which encompasses 50% of business financing. The bank also recorded one million SME financing accounts whereby 88% of them were business financing accounts. 

BNM has given RM31.1 billion in funding for SMEs. The bank’s allocation for the SME fund was RM11.2 billion in mid-September 2021, having been boosted by RM4.5 billion following the publication of Budget 2022.

  • This article first appeared in The Malaysian Reserve weekly print edition