Myanmar: Unblocking the path to capital freedom
Myanmar’s financial sector must progress towards becoming more inclusive of small and medium enterprises (SMEs), which form the backbone of the country’s economy, but face difficulties obtaining access to funds for expansion and growth.
“We need to liberalise the financial sector to encourage start-ups and support SMEs. This involves integrating the full-range of financial services into the system, from microfinance and banking to insurance and capital markets, to reduce the risk of financial instability,” said by Daw Thet Thet Khine, Member of Parliament and Member of Banks and Monetary Affairs Development Committee during a recent forum hosted by the American Chamber of Commerce in Myanmar.
Of the 120,000 SMEs estimated to operate in the country, just 27,000 are officially registered, enabling them to apply for loans, while most are self-financed, according to statistics quoted by Eric Rose, lead director for at the law firm Herzfeld & Ruben (HRMR). Meanwhile, Myanmar’s 24 local banks have extended business loans amounting to just US$12 million compared to Singapore, where the outstanding loan portfolio of DBS Bank alone is US$120 billion.
While that’s because banks and other lenders like angel investors and venture capitalists are held back by restrictive regulations and the lack of clear laws, businesses must also play their part in attracting funds from potential investors.
“In Myanmar, banks are very restricted by central bank rules as to how much they can lend,” said Rose. As such, businesses need to show lenders and investors that they deserve access to the capital they need to grow. “You need to show that you know how to run your business well and prove that it is financially sound. There also needs to be some solid collateral to cover part of their lending risk, and a gesture of confidence, such as a personal investment from the business owner, to raise the chances of obtaining funds,” said Rose.
So how can businesses raise their attractiveness to potential lenders and investors? Here are three tips to gain better access to capital from an education program developed by HRMR and the US Small Business Administration:
Character and credit
When considering whether a business qualifies for loans, lenders look at the owner’s character. “They will look at your personal reputation and speak to the people you have worked with to judge your reliability as a business partner. You will need to show you have experience running a business,” said Rose.
Getting prepared for the new Credit Bureau, which is expected to open within the next 12 months, is also important. “The bureau will rate each business based on how often it pays the bills. The higher the score, the higher the chances of securing funds,” said Rose. “The credit score will also determine the rate and terms of the loan. If your score is higher than your competitors, you get a lower rate and better terms.”
Capacity and cash flow
It’s also important to show that your business makes enough money to pay all its bills, including paying back the new loan. “If you are an existing business, lenders will look at how much money you have made in the last two years. If you are just starting out, then lenders and investors will look at your business plan, projections of revenue and expenditure,” said Rose.
So, getting proper financial statements or a realistic business plan prepared could be the keys to qualifying for an attractive loan.
Collateral and capital
Lenders will look at the assets that can be used as collateral for the loan. “In most cases, lenders will require business owners to personally guarantee the loan,” said Rose.
Importantly, lenders will also scrutinise the net worth of the business, or what the business owns after deducting the liabilities. “A lender would expect you to have injected some personal equity to the business, or to have some skin in the game,” said Rose. “This shows your commitment to the business and what you have at risk if the business fails.”
Businesses must also be prepared to explain what the loan will be used for. For example, buying real estate, equipment or inventory, or if it the money will be used as working capital. “Lenders will also consider how other businesses in the same industry are doing when deciding to extend a loan,” said Rose.