Market Gaps on Access to Finance - Bank of Valletta

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Malta Business Bureau – <strong>Market</strong> gaps in access to finance April 2013 3.1.4 The development-growth stage At this point the firm will start focusing on keeping up with competition and reducing costs, and as a result long-term production changes may be made - a factory may be purchased, or a new branch established. Outsourcing may also be a viable option to reduce costs. In this stage the firm relies on profits and existing funds for finances, and may also rely on the government and banks for further financing. In Malta, with the availability of financial statements and customer demand/ contracts, such a firm is more likely to be able to prove its viability and attractiveness and secure government assistance and bank loans. This financing might also enable the firm to release its initial financial backers, including family and friends. Any informal investors would also start looking at an exit strategy. 3.1.5 The expansion-growth stage To reach this stage the firm must realise that it is not enough to just be an established company - to keep up with competition and remain relevant, the firm may consider expanding into new markets and distribution channels. This is carried out through market development (new markets), product development (new/ improved products) and diversification (new product and new markets). At this stage there could be the creation of new departments/ divisions, the building of other premises or the acquisition of other businesses. These changes can be deemed as risky as the firm would be starting fresh in new markets, and hence might require the founder to bring some of the seed stage and related funding back to the business. Locally, the firm may share the cost of new projects by entering into joint ventures with other companies or directly from banks, but may also get funds from private investors (through informal approaches), partners, and licensing. A firm in this stage and with a potentially successful track record in its core product/ service might also be able to start looking at institutional investors. In Malta, organisations which pool large sums of money and invest those sums in securities, real property and other investment assets are the investment fund managers, insurance companies, pension schemes and banks’ investment arms. Some banks have also invested equity directly in local companies, even though this practice is locally not common due to the local banks’ cautious approach to investment and lending, increasingly stringent regulatory capital adequacy requirements and the current financial and economic crisis. Only the largest local companies would be able to list their bonds or shares – generally the listing requirements and related costs are too exorbitant for SMEs 48 . The figure below, taken from Ernst & Young’s Funding the Future publication 49 , combines the above discussion related to the stage of SME development, enterprises’ revenues, various funding mechanisms, and related risks. 48 In a Eurobarometer survey carried out in 2009, Maltese firms were mostly to mention small size as the main obstacle for not being listed on the stock market (94% vs. 82% for EU27; European Commission (2009), Eurobarometer: Access to finance – analytical report). 49 Ernst & Young (2012), Funding the future – access to finance for entrepreneurs in the G20 Page | 24
Malta Business Bureau – <strong>Market</strong> gaps in access to finance April 2013 Figure 2: SME development and funding instruments Source: Ernst & Young (2012), Funding the future – access to finance for entrepreneurs in the G20 3.2 Small size constraints Apart from the inherent difficulties associated with each lifecycle stage and which are faced by SMEs across all Europe, local SMEs have additional daily constraints arising from the national territory’s small size. These constraints are likely to magnify any access to finance issues. The size of the domestic market is too small and acts as a limiting factor on competition possibilities. This might facilitate market dominance by firms, but there are also very competitive markets (potentially new entrants are attracted by a misconception of the market profitability) that make it very difficult for existing companies to make an adequate return on capital. As a result many companies close down causing negative repercussions on these sectors as a whole. Another constraint relates to barriers to entry. Natural barriers exist due to the poor chances of success of new businesses in products and services already supplied by existing firms. For instance, importation in bulk is often required to avoid excessive fragmentation and reduce (unit) transport costs, especially in the case of raw materials. This requirement limits the number of potential players in the market. Moreover, the additional transport costs end up being included in the price of imported industrial supplies and finished goods. Apart from high costs of transport per unit, insularity may also lead to additional problems related to time delays and unreliability of transport services, creating risks and uncertainties in production. To cater for sudden changes in demand, therefore, firms end up keeping (relatively) large stocks and incurring additional costs related to tied-up capital, warehousing and other storage costs. Moreover, in a small domestic market like Malta, market failure due to social and environmental externalities is more likely to take place. In Malta this often leads to the need to limit the number of products. In addition, the poor natural resource endowments and low inter-industry linkages result in high import content, again increasing local SMEs’ vulnerability. In the same way, Malta’s market is highly dependent on exports and therefore on economic conditions in the rest of the world. Even though this high degree of export orientation is a safeguard for maintaining competitiveness, it also implies potential volatility in earnings as has been the case with the recent financial and economic crisis. Small size also renders the exploitation of economies of scale advantages difficult, leading to a high cost per unit of production. It is thus often the case that a local SME will find it difficult to reach the critical mass required to enable it to successfully compete in the international market. Likewise, the Page | 25
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A: National Grants/Pu blic aid C: B
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Market Gaps on Access to Finance - Bank of Valletta

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