Abstract. During the Post-Financial Crisis Era, the management of financing risk of the small and medium-sized enterprises shall be strengthened. This paper makes analysis on the major manifestations of financing risk of the small and medium-sized enterprises. On this basis, it makes deep research into the roots of financing risk of small and medium-sized enterprises. This paper has further put forward the countermeasures of the development of the small and medium-sized enterprises, which are suitable for the current development of China.
Key words： small and medium-sized enterprises; financing risk; strategy
1.Introduction
The financing problem is the greatest bottleneck that restrains the development of small and medium-sized enterprises in the current stage. From the international practice, the financing of enterprises include mainly the equity financing of issuance of securities. Financing of small and medium-sized enterprises is a difficult problem in the world. The same obstacle is also in front of all western small and medium-sized enterprises in China, and even worse, there are more difficulties for them because of their characteristics and the unfavourable external environment. In business economics, risk financing is concerned with providing funds to cover the financial effect of unexpected losses experienced by a firm. Traditional forms of finance include risk transfer, funded retention by way of reserves and risk pooling.
In the year 2008, the subprime mortgage crisis, which took its outbreak in the United States of America, gradually turned into the European debt crisis. The U.S. subprime mortgage crisis was one of the first indicators of the financial crisis, characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages. The global economic faces shock and there is no exception for China. Zhejiang"smanufacturing is centred upon electromechanical industries, textiles, chemical industries, food, and construction materials. In recent years Zhejiang has followed its own development model, dubbed the "Zhejiang model", which is based on prioritizing and encouraging entrepreneurship, an emphasis on small businesses responsive to the whims of the market, large public investments into infrastructure, and the production of low cost goods in bulk for both domestic consumption and export. According to statistics, in the year 2011, there have been over 1200 enterprises that have stopped production and announced bankruptcy in Zhejiang Province. During the Post-Financial Crisis Era, it is an important and strategic topic on how to expand the financing channels of small and medium-sized enterprises and how to strengthen the management of financing risks for small and medium-sized enterprises.
2.The Major Manifestations of the Financing Risk for Small and Medium-sized Enterprises
As for the causes of the financing risks for small and medium-sized enterprises, there are different expressions in the circle of academy. Luo Xun (2005) considers that the overall manifestations of small and medium-sized enterprises in the current stage in our country are “under loaded” while parts of it are shown as “over load”. Small and medium enterprises finance is the funding of small and medium sized enterprises, and represents a major function of the general business finance market, in which capital for different types of firms are supplied, acquired, and costed or priced. Capital is supplied through the business finance market in the form of bank loans and overdrafts; leasing and hire-purchase arrangements; equity/corporate bond issues; venture capital or private equity; and asset-based finance such as factoring and invoice discounting. Lian Jing-lin (2006) considers that the major source of the financing risks of small and medium-sized enterprises comes from that the enterprises could not offer the content financial payment risks to the shareholders because of the insufficiency of the payment ability of the company. However, not all business finance is external/commercially supplied through the market. Much finance is internally generated by businesses out of their own earnings and supplied informally as trade credit, that is, delays in paying for purchases of goods and services. Compare to the financial lever risks, the financial payment risks will have relatively large effect on the finance of the company.
The purpose of the enterprise financing is to improve the self qualities of the enterprises and increase its ability to earn profits. This paper makes analysis into the major risks of financing of small and medium-sized enterprises from direct financing risks and indirect financing risks. Corresponding to financing risks, there are several kinds of manifestations of major financing risks, which are shown as the followings:
2.1.Financing risks of stock options
The financing risks of stock options refer to the possibility of loss of the operation results due to all kinds of reasons. As with all securities, trading options entails the risk of the option"s value changing over time. However, unlike traditional securities, the return from holding an option varies non-linearly with the value of the underlying and other factors. Therefore, the risks associated with holding options are more complicated to understand and predict.
2.2.Financing risks of enterprise merger
Financing risks of enterprise merger refers to the act that small and medium-sized enterprises get the finance that is necessary for the development and survival of the enterprises through the ways of equity exchange, according to its development strategies and the requirement scale of the capitals. Enterprise merger and acquisition exerted a great impact on its financial frame work and brought about corresponding financial risks. The final result is that enterprise management has to make a careful analysis of financial risks and to take effective preventive measures in the course of enterprise merger and acquisition. Enterprise merger and acquisition can rapidly expand the scale of the enterprises and strengthen the competitiveness of the enterprises. However it is as well a kind of financing method full of risks at the same time.
2.3.Financing risks of equity transfer
When the small and medium-sized enterprises in our country carry out transnational operation, joint ventures and purchasing belong to the financing activities of small and medium-sized enterprises. An equity investment generally refers to the buying and holding of shares of stock on a stock market by individuals and firms in anticipation of income from dividends and capital gains, as the value of the stock rises. Typically equity holders receive voting rights, meaning that they can vote on candidates for the board of directors as well as certain major transactions, and residual rights, meaning that they share the company"s profits, as well as recover some of the company"s assets in the event that it folds, although they generally have the lowest priority in recovering their investment. Being restrained by the self management conditions and the technology conditions, the small and medium-sized enterprises faces operation loss easily when the large amount of capital runs into some management problems. It will directly threaten the survivals and development of the enterprises and this is the financing risks of equity transfer.
2.4.Risks of Financial Leasing
The finance lease is a kind of financing method of strong adaptability. It is produced when the market economy has developed into certain stage. A finance lease or capital lease is a type of lease. It is a commercial arrangement where the lesser will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee. Small and medium-sized enterprises will offer more beneficial conditions to financing through this kind of method.
2.5.Irregular financing risks
Irregular financing risks mainly refer to the financing risk of private lending. Relative departments are studying, trying out and improving a tracking and monitoring system on private lending to provide more comprehensive information for economic decision making and macro-economic control. Regulators will keep a high-profile stance over shark loans and other illegal activities accompanying the lending activities. This is quite common in the private enterprises of small scale. However, the interests are relatively high and the credit restriction is relatively bad. The finance resources are unstable and there is a lack of laws and justice. This kind of financing method will usually have greater uncertainty to the development of the enterprises.
3.The Roots of Financing Risk for Small and Medium-sized Enterprises
There are internal reasons and external reasons for the formation of the enterprise financing risks. The internal causes include the liability scale, the interest rate of liability and the term structure of liability. As for the external causes, they refer to the management risks of enterprises, the expected cash flow amount and the flow of capital as well as the financial market and so on.
3.1.Internal cause analysis of financing risks
The internal reason for financing risks in small and medium-sized enterprises are mainly the financing risks caused by the liability scale, the interest rate of liability and the term structure of liability and so on. Since the viability based approach is concerned with the business itself, the aim has been to provide better general business development assistance to reduce risk and increase returns. This often entails a detailed review and assistance with the business plan. A common aim or feature of the viability based approach is the provision of appropriate finance that is tailored to the cash flows of the small and medium size enterprises. Although the returns generated by this approach in less developed countries may not be attractive to venture capitalists, they can be significantly better than conventional collateral based lending. Thus, a new, distinct asset class, offering a new avenue for diversification, is available to investors. With higher profitability than traditional small and medium sized enterprises finance and lower risk than traditional venture capital, this sector has been named the growth finance sector. In the past, a significant obstacle to applying this approach in less developed countries has been getting the information required to assess viability, plus the costs of transferring and providing business development assistance. However, in the last several years, improved information and communications technology have made the process easier and cheaper. As technology and information sharing continue to improve, the approach could become significantly more cost-effective and attractive to established financiers with viability based approaches, and to consultants providing business development assistance to small and medium-sized enterprises in other, more mainstream areas. Some investors have promoted this approach as a means of achieving wider social benefits, while others have been interested in developing it largely in order to generate better financial-economic returns for shareholders, investors, employees, and clients. The irrationality of the term structure arrangement will add the financing risks of the small and medium-sized enterprises.
3.2.External cause analysis of financing risks
The internal reasons for financing risks in small and medium-sized enterprises are mainly the financing risks caused by the management risks of enterprises, the expected cash flow amount and the flow of capital as well as the financial market and so on. The effective management of lending to small and medium-sized enterprises can contribute significantly to the overall growth and profitability of banks. There has been considerable research and analysis into the methods by which banks assess and monitor business loans, manage business financing risks, and price their products ? and how these methods might be further developed and improved. In addition to these, the liability operation of the enterprises is affected by the financial market. This will as well result in the financial risks of the enterprise in the general condition.
The internal and external causes of financing risks relate to each other interactively and react interactively, which jointly reduce to the financing risks.
4.The Countermeasures to Prevent the Financing Risks of Small and Medium-sized Enterprises
According to the actual circumstance of financing of small and medium-sized enterprises in our country, this paper puts forward the following countermeasures based on the financing risks of small and medium-sized enterprises in our country:
4.1.Construct a sophisticated credit evaluation system for small and medium-sized enterprises
Construct a sophisticated credit evaluation system of small and medium-sized enterprises. It is one of the major methods that affect the external reasons of financing channel. The information asymmetry is one of the main reasons for the difficulties of financing. Not only the banks refuse to offer loans to the small and medium-sized enterprises, but also the public refuse to accept the valuable securities of small and medium-sized enterprises. How to make the “information asymmetry” between the small and medium-sized enterprises and the external society has been a problem. One of the most effective methods is to construct a sophisticated credit evaluation system for the small and medium-sized enterprises.
4.2.Build the credit guarantee system of all levels for small and medium-sized enterprises
Small and medium enterprises credit guarantee is the efficient way to solve the capital problems. Comparing with guarantee small and medium-sized enterprises credit guarantee has such characteristics as nature of special object and type, nature of specialty, nature of high risk, and nature of government promotion, etc. There are a series of legal relations in small and medium-sized enterprises credit guarantee including four kinds of fundamental ones: guarantee relation, cooperation relation, and entrusting relation, and risk-shared relation.
4.3.Change the view of state-owned business banks and serve actively for small and medium-sized enterprises
On the one hand, the business banks should set foot from the management system of credit management. Financing risks of enterprise merger refers to the act that small and medium-sized enterprises get the finance that is necessary for the development and survival of the enterprises through the ways of equity exchange, according to its development strategies and the requirement scale of the capitals. On the other hand it shall strengthen the institution reformation of the banks and improve the efficiency.
4.4.Encourage the development of non-governmental financial institutions of small and medium size
As the financial institutions in our country are currently he Big Four banks, which include the Bank of China, China Construction Bank, Industrial and Commercial Bank of China and Agricultural Bank of China. The development of the other financial institutions is in the disadvantageous condition. However, in order to solve the risk problem of the small and medium-sized enterprises during the financing process, the development of the small and medium-sized enterprises shall be encouraged. On this basis, it makes deep research into the roots of financing risk of small and medium-sized enterprises. From the international practice, the financing of enterprises include mainly the equity financing of issuance of securities. Financing of small and medium-sized enterprises is a difficult problem in the world. The same obstacle is also in front of all western small and medium-sized enterprises in China, and even worse, there are more difficulties for them because of their characteristics and the unfavourable external environment. In business economics, risk financing is concerned with providing funds to cover the financial effect of unexpected losses experienced by a firm. It is to a certain degree solve the risk problems formed due to the difficulty of financing of small and medium-sized enterprises.
5.References
[1]Michael J.Mumford,Corporate Governance and Financial distress:When Structures Have to Change,Lancaster University-Department of Accounting and Finance,March 8,2003, page:89
[2]Edward I.Altman,Predicting financial distress of companies:revisiting the Z-score and zetamodels,July,2000，page:100-104
[3]LUO Xun. The management of financing risks of enterprises. Technology economy[J]，2005(l):51一52
[4]Li Geng-yin, ZHOU Xian-zhi. The research on the supporting system of the development of small and medium-sized enterprises in China. Economic science publishing house,2004,192-221.