Conflict Management

Topics: Finance, Bank, Corporate finance Pages: 7 (2540 words) Published: April 30, 2013
Analysis of Financial Problem for Chinese Small to Medium Sized Companies

In the recent years, small to medium sized companies (SMEs) play an important role in most countries over the world. It has been a vital policy issue for governments to deal with these companies to increase development of economy. The financial difficulties faced by SMEs have restricted SMEs’ survival and development. SMEs exist a series of financial problems. This article focus on how to obtain effective financial source and dealing with the difficulties in raising finance for Chinese SMEs. Key words: Small and medium-sized Companies (SMEs); Financing. Introduction

SMEs are the necessary power for economy growth. As Beck and Demirguc-Kunt (2005, p2932) said that there was robust partial connection between the importance of SMEs in manufacturing and economic development. According to Ayyagari (2007), formal SMEs contribute to 50% of GDP on average in developing countries and World Bank views SMEs as a core element in developing economy and employment. In China, the number of registered SMEs exceeds 40 million, accounting for more than 99 per cent of enterprises. As a private sector, SME has become a driving force since the economy began to recover in 1978 (Fan, 2007). And it makes up more than 70 percept of the GDP. According to Brookfield, SMEs can be regarded as unquoted small businesses and a medium for self-employment of the owners that are organized by few individuals, typically a family group and 
act as a medium for self-employment of the owners. In China, the government gives a definition about SMEs in the SME Promotion Law. The scale of production and operation belonging to various forms of ownership are small-and medium-sized enterprises. The main body of this paper is structured into two sections. Section one concentrates on source of finance for SMEs. Section two discusses several key barriers on getting financial support for SMEs. Source of finance for Chinese SMEs

In general, Chinese small to medium sized companies usually access financing from two channels: internal financing and external financing. Brookfield introduced the rough structure about the order for companies to raise money. In China, the order for SMEs to get support is followed by accumulation of enterprises, bank credit loans, private loans, and other means (WANG, 2009). In the term of internal financing, SMEs can obtain a little capital through their own capital, including their original investment and retained earnings (Zhang, 2012). The owner’s personal investment in business consists of two parts, their own capital and funds from their friends or families. Retained earnings are also a limited source of capital for new businesses, particularly for those industries that take years to mature, such as the biotechnology and pharmaceutical industries (Ritchie and Xiao, 2004, p29). Enterprises use retained earning to distribute the profit after tax and to determine the amount of retained money for companies. It can increase the capital of the enterprise without increasing corporate liabilities (Bai, 2011). At the beginning of business, these equity investments might adequate for the current period to carry out the basic operation. Obviously, these are not enough for further development, especially in capital-intensive industries. In short term, it makes up a high position of self-raised investment for SMEs while external financing source is limited. External financing is anther important source for financing, which contains direct financing and indirect financing. Direct financing means that founders do not need to finance with financial institutions as the intermediate. Indirect financing means that founders need provide something that can be proved by banks trust institutions, insurance company (Zhang and Wu, 2012). Then, companies can gain capital support from financial institution. Firstly, commercial bank loans can be recognized as a direct way to...

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