The factors of affecting financing and Countermeasures in SME-Based on asymmetri

Abstract: SME plays an irreplaceable role in the national economy and plays a huge role in China's economic development. However, SME faces many difficulties because of its characteristics. Especially financial difficulty has become the biggest bottleneck. The article indicates from internal and external factors that information asymmetry and higher costs owing to its own governance structure are the main reason of financing difficulties of SME, and then put forward the corresponding solutions.

Key words: asymmetric information, small and medium enterprises, financing

1. Introduction

SME plays an irreplaceable role in the national economy and plays a huge role in China's economic development. The amount of small and medium enterprise is estimated up to 10.231 million under the current criteria for the classification of SME, which is more than 99% of the total number of enterprises. Currently, the small and medium enterprise creates the ultimate value on the products and services of more than 60% of GDP. The tax amount has exceeded 50% of total state tax revenue. SME provides more than 80% of urban jobs. It is the obvious contradictions that SME faces financing difficulties in the development of China currently. How to solve the financing difficulties and create more development opportunities for small and medium enterprise has related to the future development and the development potential of SME. If the financing problems are not solved, it will not only affect the development of SME, but also affect the healthy operation of the entire economic system.

2.The factors of affecting financing in SME

Endogenous capital and bank credit are the main source of funding for SME. Clearly, the small and medium business can not meet growing demand for capital solely relying on the source of financing. Indirect financing has become the primary means of raising funds for SME. The mainly difficulties of SME financing is the indirect financing in the current, which is difficult for SME to obtain financing from banks or obtain the amount of funds to meet their needs. In essence, the reasons can be summarized as both internal factors and external factors.

2.1 external causes - information asymmetry

Bank loans program obtain the expected return depends not only on interest rates, but more directly dependent on the risk of default. Because of asymmetric information, It is asymmetry that the "hard information" of actual need of bank such as project return rate and the "soft information" of the reality of SME, which lead to banks can not accurately determine the risk of businesses loans, so the interest rate has to be a main tool as vendor selection. As a result of adverse selection, Low-risk borrowers may be squeezed out by high-risk borrowers in the market owing to raising interest rates. Because risk-averse borrowers will exit the market at higher interest rates. High-risk borrowers are often left to bear high interest rates. Therefore, the interest rate increase may lead to risk structural changes in the credit market. Borrowers present high risk characteristics as a whole.

The existence of moral hazard may attract borrowers to higher-risk investment projects under high interest rates. Higher interest rates increase borrowers' incentives to engage in high risk investment. Lenders can not fully monitor the behavior of borrowers because of information asymmetry between the lenders and the borrowers coupled with the cost of monitoring itself. Thus, banks have to consider the incentive and restraint mechanisms for the borrower's behavior. Interest rates can change the behavior of borrowers both as a mechanism for identifying and as an incentive mechanism for influencing the bank's expected return. As increase of the interest rate raises the borrower's incentive to engage in high-risk investment, the bank's earnings will reduce. Borrowers may take “deviant behavior” against the interests of loans as a result of higher interest rates. And the supervision of lenders is difficult. Therefore, Banks would rather identify business risks than raise interest rates. The identification of the risk depends on the collection and processing of information. That is, banks tend to compare the marginal benefits given the interest rate and the marginal costs of information collection and processing for identifying business risks. In our current market economy, due to non-standardized information disclosure and disclosure conditions, the degree of information asymmetry between the banks and the SME is often higher than the bank and the large enterprise. So in the credit markets SME usually becomes the "defining" object out of credit markets.

2.2 internal factors - high cost of the marginal information

From the point of the internal factors, the difficulties of SME financing reflect the marginal information cost of SME is higher than large enterprise which is due to SME’s specific information structure. The hierarchical structure is typical feature of internal governance in large enterprises. It has two prominent characteristics: Firstly, it is the separation from the enterprise ownership and management, Professional decision-making power is conducted by management capability, which resulted in the division of various functions on the horizontal direction. Secondly, from top management to the primary sector is defined into several aspects based on the division of functions, which result in the enterprise-level organizations on the vertical direction.

This internal hierarchical structure depends on the characteristic of large enterprises. Along with the expansion of the enterprise scale, the increase of the workload and the enhancement of the work complexity, Owner's personal management effectiveness is more and more restrained by their limited rationality and management ability. Complex management procedures can be reasonably resolved through the hierarchical system. The various specialized departments are responsible for specific job. The highest level of rights is responsible for the coordination of the whole work. Therefore, its essence is the redistribution of the internal management capability and the specialized division of the human capital efficiency.

However, it will also increase the level of the information processing that increase the level of enterprise internal government. In order to ensure the information to communicate timely and accurately between the different decision-making layer and the same decision-making layer, the large enterprise requires transferring information 、making decision and execute command by standardized procedures. Therefore, the information disclosure structure of the large enterprise must be standardized and easy to transfer. Large companies usually have a sound financial accounting system and standardize financial statement system in reality.

In contrast, the small and medium-sized enterprises lie in the initial stage of the development, small scale, non-stable operating condition, so the management complexity has not exceeded the owner's personal ability. In the internal management the top management layer often directly command the production activities of the operation staff or only a small amount of middle-level management personnel participate in the job. Therefore, the character of the small and medium-sized enterprise’s governance structure presents simple and single.

In this kind of governance structure, enterprise ownership and management become one power. As the level of the internal management is less and the complexity degree of the management reduces, the corresponding levels of transfer information are less. Due to the principle of the most economic using information, business owners tend to collect scattered information by their own and centralized to make decision so as to ensure that they use information flexibility and make quick response in the face of emergency process.

However, the primary scattered information is not broken up or just broken up finitely in the process of passing to the top management, so it does not have a standardized expression form. It is only a set of data which contain much side information. It has strong personalized characteristics. For the enterprise's internal management, they can understand accurately and quickly obtain the minimum "information collection" that they need depending on the long-established experiences under the particular production relations. But for the external users of information, they face a group of heterogeneous and chaotic data. It is difficult for them to understand.

One of the main features in the modern market economy is that ability which the manufacturers occupy and use the resources is an increasing function of effective information release. Validity of the information and its disclosure path become a direct reflection of the manufacturer’s market competitiveness. They are the "passport" by which manufacturers enter the modern economy operations. This information structure of the SME reduces internal information costs, but it increases the ambiguity of information disclosed and the cost that outside investors acquire and use information at the same time. Basically the financing problems of the SME depend on what extent the external investors trust the enterprise internal information. Although the financial statements may contain fake information, the overall sense, due to the lack of standardized information disclosure for the SME, the marginal reputation cost of the SME is higher than the marginal reputation of large enterprises, which is the internal difficulty of the SME financing in essence.

3. The development strategies of the SME financing

3.1Build multi-level financial systems

3.1.1 Open up new avenues for SME financing

To solve the difficulties of small and medium-sized enterprise financing, we should build multi-level financial system in which medium and small banks develop together, the state-owned, foreign and private banks complement each other and listed, trust and security work together. For example, new mechanisms for bond financing of SMEs should be publicly established by local governments or trade associations. A number of key small and medium-sized enterprises should be screened to issue joint corporate bonds in public who have sustainable profitability, good sense to prevent the risks and strong solvency in order to reduce financing costs and meet the medium-term financing needs. The policy bank should be formed for small and medium-sized enterprises.

3.1.2 The private capital into the body from the pump cycle

The property rights of the folk financial institutions are clear and agent chain is short, so the agency cost of the folk financial institutions is low and the mechanism is flexible. The folk financial institutions have a stronger ability to control risk. Folk financial institutions can often fully understand the business activities of the borrowers engaged in, wealth status, social relations and moral by making full use of social and geographical advantages. This information helps to measure operational risks, credit capacity, social cost and psychological cost of the breach. Therefore, the development of small and medium-sized enterprises need fully mobilize the enthusiasm of the folk capital holders. Private capital appreciation ability should be increased. At the same time informal finance should be specified and developed in order that the folk capital gradually incorporated into the formal financial system. The folk finance will be translated into the small and medium-sized finance. Then the supervision on them will be strengthened so that we can make full use of the civilian capital to serve the economic construction in China.

3.1.3 Perfect the system of capital market

The second board market should be opened up for small and medium-sized enterprises in the system of direct financing. The development prospect of many small and medium-sized enterprises is very good and all aspects of the operating condition are also good, but the assets of the small and medium-sized enterprises are too small to reach the conditions that main board market need. So they will not raise funds directly from the capital market. In this situation we should actively create conditions to open the second board market in order to specialized help the enterprises with high growth innovations, especially high-tech companies.

3.2 Perfect the credit guarantee system of SME

3.2.1Establishment of multi-level and multi-channel credit guarantee systems and mechanisms

The establishment of credit guarantee institutions promotes credit rating of the small and medium-sized enterprises. They can effectively solve the financing difficulties of small and medium-sized enterprises and reduce the bank loan risk. They are the strong measures on construction of social credit environment. Therefore, it is necessary that establish an efficient, suitable for small and medium--sized enterprises of their own characteristics credit guarantee mechanism. Credit guarantee institutions are not simple, blind to provide security for small and medium enterprises. It is based on the detailed information which credit guarantee institutions collect and investigate for small and medium-sized enterprises. In order that the credit guarantee institutions can realize the expected function, we must establish perfect credit archives, which make small and medium-sized enterprises a real record.

At the same time, credit guarantee institutions should also strive to construct a scientific standard credit management system in order to reduce the cost, simplify the guarantee process and improve financing environment. Multi-level and multi-channel credit guarantee systems and institutions should be Implemented. The function of credit guarantee institutions mainly has two kinds of forms. One is the government as the main body of credit guarantee system which establishes the structure of independent legal qualification. It operates openly and accepts market and government supervision. It is a public group and not for profit purposes. Due to the intervention of government and the switching of bank risk, small and medium-sized enterprises can be relatively easy access to loans. The other is the guarantee system that small and medium-sized enterprises set up jointly to which the small and medium enterprises pay fees regularly. They can obtain corresponding guarantee. This form is set up by small and medium-sized enterprises. They fund themselves and take risk to themselves. They are clear the members of the situation. So they can give the bank loan a strong guarantee. In addition, the functions of the credit guarantee structure can also be made of the bank, government, small and medium enterprises as well as social mechanism jointly.

3.2.2 Solve the small and medium-sized enterprises financing constraints to the credit grade through business innovation

Self-liquidating trade financing chain is the effective way to solve the current financing difficulties of small and medium-sized enterprise in our country because the credit rating is low. The large and the small and medium-sized enterprise publicly build credibility alliance, So the credit rating of the small and medium-sized enterprise can be promoted from the financial technology level. Banks provide loan for the small and medium enterprises not on the base of the enterprise own credit rating and the scale of capital, but on its trade environment, trade object and business continuity which give the gospel for the small and medium-sized enterprises of financing difficulties but a good development momentum,

3.3 Improve the corporate governance structure

It is the key that the financing object chooses organization configuration of itself and perfects governance structure as the promotion of SME financing. There are three kinds of normative enterprise form, namely the proprietorship, partnership and corporation system. Partnership is no property of independent legal person from the law. That is, Partnership is the form which is expanded by the proprietorship. The corporation system has a fundamental change relative to the client system on the corporate governance and financing structure. First of all, the direct operator of the enterprise is the agent. The owners do not participate in the direct operations. The inherent reason of this approach basically originates from the needs of financing. Due to the capital limit of the individual owners the company needs more partners in order to expand the financing range. But the partnership poses the problem that each partner should bear joint responsibility each other, but the changes of the partner’s property and health will give the partnership great instability. The corporation system has created legal property of independent shareholder. The sources of raising fund make more widely because it does not have to consider the personal property and health status of capital providers. In addition, the transfer of the equity will not affect business stability in the governance structure of the corporation system so that the equity obtains higher liquidity. The enhancement of liquidity reduces the risk of the stock, also reduces the cost of financing for the enterprises.

References

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[3] Shi Bai , the cropland of financing diffculies of SME, Economic theory and management,2008(7)