WHILE the impact of the pandemic continues to hurt business worldwide, there might be light at the end of a tunnel for Malaysian small-medium enterprise.

Various initiatives introduced by the government have helped many businesses to stay afloat. The initiatives include wage-subsidy programme (WSP), amounting to RM12.49 billion.

Despite the threat posed by the pandemic, opportunities are also there to be grabbed. SMEs and those planning to venture into entrepreneurship should grab opportunities, such as through Penjana SME financing with allocation of RM2 billion.

But the main dilemma faced by the SMEs in the current situation would be the choice of financing.

The pecking-order theory suggests business should start with internal financing, debt and equity as the last choice.

It is based on the cost associated with each financing method. In order to fulfil the criteria as SME in Malaysia, a business must meet three conditions – namely, qualifying criteria, types of establishment and shareholding structure.

The six-month loan moratorium earlier in the year to ease the financial burden of citizens can be used by those who are able to save the money that initially should be paid for their monthly commitments, as a start-up capital for their business.

The decision based on this reflects on the first pecking order, which is internal financing. It is the safest and the bears the lowest risks to an individual who wishes to start a business.

For already established businesses, the saving that may derived from loan moratorium, or savings generated from reduced expenses, such as in rental expenses, might be used to further expand their operation.

However, with the uncertainty surrounding the business environment, parties have transactional and precautionary motives to holding cash rather than speculate.

The choosing of debt as the main source of financing currently seems more attractive. This is due to the financing facilities offered by banks in response to the overnight policy rate (OPR) announced by Bank Negara Malaysia (BNM) at 1.75%.

The adjustment on the interest rate can make additional room for new financing. When the borrowing cost becomes cheaper, business will be more influenced to borrow and eventually keep economic activities running.

Nevertheless, before any financing agreement is inked, businesses need to know whether they can serve their commitment should the interest rate jump at a ceiling rate, and taking also into consideration whether they can achieve minimum sales so as to avoid financial distress.

A heavy reliance on debts with significant drop in sales proves disastrous in various industries, as evidenced globally.

Although equity financing falls last in the pecking order, the application is different with SMEs in terms of the concept of asymmetric information and concentrated ownership. In addition, the fee incurred by a public-listed company for equity financing is higher compared to private company.

Private companies in Malaysia are prohibited from offering shares or debentures or invite the public to invest.

As such, equity capital usually comes from the owner, family, or friends in consideration of company’s shares. This fund normally comes from lifelong savings or personal loans of these parties for the purpose of setting up or investing into the business.

But what happens if the business is not sustainable? The shareholders who used their savings will surely lose their investment. Imagine the state of your mind when your savings are lost in a blink of an eye.

The impact to those who obtain personal loan will be more severe as they still need to make monthly commitments for a business that gives no return.

Therefore, a thorough assessment needs to be implemented before any financing decision is taken. More than 2,700 SMEs have closed shops due to the pandemic, making the decision to enter the market or expand more difficult.

With various channels available for financing, it also brings dilemma on types of financing to be chosen.

Despite the facilities available, it is not guaranteed that the financing facility will be granted as creditworthiness of the applicant still needs to be scrutinised. As such, other alternative methods of financing, such as equity crowdfunding (ECF) and peer-to-peer financing (P2P), are something that SMEs need to consider. – December 5, 2020.

* Fadhirul Hisham Aziz is a corporate administration lecturer in UITM Seremban.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.