Brief: the rapid growth of smes faces many difficulties, of which financing difficulties are the main bottlenecks to development. With the gradual improvement of our market economy system and the rapid development of our financial markets, the emergence of innovative capital market instruments and the increasing globalization of finance are both opportunities and challenges for smes to make financing decisions。
The factors influencing sme financing decisions are both external and internal. On the one hand, the financial services chain is incomplete and the financing system is not yet adequate, while on the other hand, smes themselves have many deficiencies and congenital deficiencies, such as vague property rights relationships and closed structures; weak risk resilience; inadequate information disclosure mechanisms; the prevalence of credit deficits; and weak financial controls. The relative importance of the various factors varies in degree of influence and effectiveness under different conditions, and smes must balance the impact of the various factors in financing in order to make scientific financing decisions. The choice of financing modalities, how to capture the scale of financing, and the timing, conditions, costs and risks of various financing modalities require careful analysis and research before enterprises can finance. How, then, can best finance be developed? Funding decisions are based on the following seven points:
I. Total proceeds from financing exceed total cost of financing
Businesses finance, first and foremost, what are the returns on investment after financing? Because financing implies costs, both interest costs of funds and potentially expensive financing costs and uncertain risk costs. Thus, it is necessary to consider only when it is certain that the total benefits expected from the use of the funds raised are greater than the total cost of financing. This is the primary prerequisite for financing decisions by enterprises。
The scale of corporate finance needs to be measured
In raising funds, enterprises first determine the size of their financing. Excessive financing may result in the idleness of funds and increase the cost of financing; or it may result in over-indebted enterprises, making them unsustainable, difficult to repay and increasing operational risks. Inadequate financing, in turn, affects the normal development of enterprise investment financing schemes and other operations. It is therefore important for an enterprise to determine, at the outset of its financing decision-making, the reasonable size of its financing in terms of its financial needs, its own actual conditions and the ease and cost of financing。
Selection of best financing opportunities for enterprises
In general, full consideration should be given to the following aspects: first, the need for enterprise financing decisions to be forward-looking, the need for enterprises to have timely access to information on financial markets such as domestic and foreign interest rates, exchange rates, external environmental factors such as the macroeconomic situation, monetary and fiscal policies and the domestic and external political environment, and the need for sound analysis and forecasting of favourable and unfavourable conditions and possible trends in the financing of enterprises in order to find the best timing for financing and to make decisive decisions。
Second, taking into account the characteristics of specific financing modalities and taking into account the actual circumstances of the enterprise itself, sound financing decisions are made in due course。
Iv. Minimizing the cost of enterprise financing
The cost of financing an enterprise is a determining factor in the efficiency of financing for the enterprise, and it is important for smes to choose that type of financing. In the financing practice of an enterprise, there is a preferential order of financing, which is generally considered to be one of self-financing by the enterprise. Where small investments are made by smes, priority is given to drawing cash from deposit accounts; secondly, short-term investment realization is considered. Second, when smes have insufficient funds of their own, preference is generally given to lower distribution dividends. Third, external financing. Enterprises consider bank loans first, followed by bond issues, and finally equity issues. As can be seen from the priority given to financing, internal financing is in fact one of the highest priorities, while equity financing in external financing is the last option。
The financing theory and practice of western developed countries have shown that smes generally follow the sequence of “internal financing first, second to debt financing, last to equity financing”. However, this does not seem to be the same as the current ranking of publicly listed companies in our country. The problem is that in the fiscal practice of smes, a significant proportion of enterprises do not apply the theory of financing excellence to practice, and most of them choose the method of financing in visual judgement and at apparent capital cost. Thus, in listed companies, the more they do not want to take investment risks, the more they prefer equity investments. In addition, market inefficiencies and cost distortions have created confusion about enterprise finance. In fact, under sound capital market conditions, the cost of creditor financing is lower than the cost of equity financing, as interest on debt is a front-loading tax and has the effect of withholding tax, while dividends from equity financing are after-tax distribution, without tax relief, and creditor financing should be the preferred method of financing. However, the current stock market in our country is characterized by the existence of such issues as the distortion of stock prices due to low equity issuance pressure, which has led to the fact that equity financing costs are indeed lower than those for bonds. According to the data, the current financing cost of bank loans in the country for 3-5 years is approximately 7. 05 to 8. 17 per cent, well above the cost of equity financing of 1. 18 per cent, a phenomenon that inevitably leads to a managerial preference for equity financing。
The search for optimal capital structures
The capital structure is the ratio between creditor and equity financing of the total capital of the enterprise, i. E. The share of creditor financing in total capital. Capital structure is at the heart of enterprise financing decisions, and its essence is that capital costs are at their earliest and must be maintained at a moderate level of debt ratio. Debt borrowing has an important impact on sme financing: first, tax incentives. As interest charges on claims financing can be deducted, this preference will increase as the enterprise's debt increases its tax savings. The second is financial leverage. Regardless of the profits realized by the enterprise, the fixed interest costs charged by each dollar surplus will be reduced accordingly, which will yield additional gains for each dollar's ordinary share. Thirdly, the costs of insolvency and agency are increased. The more smes borrow, the higher the probability of bankruptcy, the corresponding increase in the cost of bankruptcy; and, at the same time, debt increases the costs of agency by placing shareholders and creditors in a conflict in the decision-making of financing, investment and dividends allocation of the enterprise, thus forcing the authorities to be more cautious about project selection. In the light of the realities of smes, it is important to balance the effects and risks of debt borrowing, to determine rationally the optimal capital structure of an enterprise, and to ensure capital structure optimization through a combination of restructuring, corporate governance re-engineering and re-engineering of incentive systems, using such methods as the company's valuation method, the capital cost-balancing method and analogies. Capital structure evolves and deepens from the traditional lever theory to the mm theory of the starting point of modern capital structure, to the theory of preferential financing and asymmetric information, which will prompt the theory and practicer to constantly explore the proposition of capital structure to better guide investment and financial practices。
Vi. Corporate strategic management needs
The sme strategy is an overall plan of action to fulfil the enterprise's mission and achieve its objectives. Strategic management is a set of measures taken around corporate strategic objectives. Financing decision-making is a concrete expression of strategic management in the course of financial activities. Depending on their own development, smes should determine the need for financing, the manner in which it is financed and the scale of financing, which is the fundamental starting point for financing decision-making. There are three types of financing. One is the rapid expansion strategy. This is a strategy aimed at achieving a rapid expansion of the size of the assets, forcing businesses to undertake substantial financing. In addition to internal financing, substantial external financing is often required. The second is a sound development strategy. This is a strategy for a smooth expansion of the size of assets commensurate with the goal of achieving steady growth in the performance of enterprises, which finance not only simply to compensate for the need for capital shortages, but rather to achieve a sound capital structure and a sound dividends policy that promotes healthy enterprise development. The third is a strategy of defensive contraction. This is a development goal strategy to prevent financial crises and survive, and such enterprises generally face difficulties in obtaining cash inflows, focusing on monitoring the effective recovery of cash, monitoring the efficient allocation and use of internal capital and avoiding bankruptcy due to financial constraints。
Vii. Issues for sme financing
First, smes eligible for loans must, when applying to banks, calculate the loan amount, determine the purpose of the loan, prepare a complete set of true information, communicate directly with the bank's client department and cooperate with the bank's investigation。
Second, if you cannot find the necessary funding for your enterprise, you should reflect on the maturity of your project (the premature project is unaffordable), so as to give your enterprise more scientific and technical content, make your products more marketable and make your enterprise more affordable。
Thirdly, when an enterprise is in a start-up phase, it is advisable to introduce venture or other investments and to look for banks at a certain level of development. In general, banks are “adding flowers” rather than “carrying in snow”。
Fourthly, sme financing is not only a method of bank financing, but even if the guarantee institution is doing well, the indirect financing provided by banks will gradually lose its dominant position in terms of national developments. For an sme in the long term, it is a wise and effective approach to ask banks (which also provide financial advisory services to enterprises) or relevant professional bodies to design financing schemes that allow a reasonable mix of financing modalities。
