Large firms as well as SMEs require financing. While large companies provide detailed financial statements and adequate collateral to banks, they are not favored.
Banks work towards diversifying their portfolios, and actually enjoy targeting many smaller firms in order to maintain a low risk and balanced loan portfolio. However, there are underlined issues preventing the successful matching between loans and SMEs.
In looking at the SME life cycle, both financial needs and modes of businesses are changing and developing over time. Start- ups rely on internal financing namely, retained earnings, personal savings and contributions from contacts and business associations, in addition to trade credit from financial intermediaries. As a firm starts to establish a track record, it attracts the attention of investors who are willing to inject equity into the company. This facilitates bank loans. By going public, the firm eventually raises funds in the securities markets. The majority of SMEs in Jordan is, however, still in the initial stages of development, and relies on personal and family members' savings for financing new ventures or the expansion of existing enterprises. However, such sources are insufficient to spur growth in an expanding and highly competitive market. Therefore, access to formal financing institutions is the necessary alternative.
There are several major obstacles that face SMEs when it comes to accessing financing. The most important problem amongst these enterprises is the information asymmetry that arises from small businesses' lack of financial information and standardized financial statements, in addition to the banks’ limited knowledge of the borrower's company. Most SMEs lack basic financial management skills and systems. This puts them at a disadvantage in accessing credit (banks are reluctant to lending), and in developing trade and investment linkages. The Jordan Exporters Association reports that inadequate financial statements impair the ability of its members to close trade deals because they are unable to demonstrate reliability.
Jordanian SMEs have no standard to adhere to when it comes to preparing financial documentation for their company. Therefore, the financial statements that they produce are not of an adequate standard, and do not reveal sufficiently detailed and accurate information about their firm. One lending officer estimates that about 75% of SMEs that approach his company do not have any financial statements prepared at all.
Since banks in Jordan are bound by certain international standards to preserve their risk rating, and these standards are limited by certain policies, they are unable to provide loans to companies that do not adhere to these policies.
SMEs corporate governance structure also leads banks to believe that they are at high risks to take on. Generally, these companies are purely family businesses, or a "one man show," therefore, do not possess the necessary administrative skills. The enterprise failure to meet credit requirements or to raise collateral is mainly due to their noncompliance with latest accounting standards and/or the absence of good management practices.
Enterprises lack the ability to present the bank an acceptable work plan and feasibility studies as they lack the know-how to develop a sound investment proposal. There are some enterprises that provide guidance and support SMEs in order to facilitate the implementation of a consulting and training program, but such programs need to be expanded. The collateral requested from the banks being too high is another issue. There are high risks involved in lending to SMEs as a result of a shortfall of assets that can be used as collateral. Banks claim that the risk requirements of certain loans necessitate this however. If however a decent business plan and detailed financial statements are presented the necessity for collateral drops, and this is an aspect of the inadequate access to finance that can be addressed. The high risks involved in lending to SMEs as a result of a shortfall of assets of assets that can be used as collateral, high failure rates, low capitalization and vulnerability to market risks, are compounded by the higher transaction costs associated with lending. There is a lack of incentives to the banking sector involved in lending to SMEs. Because of the high costs banks incur in dealing with SME accounts, banks decline to extend loans to SMEs unless they are fairly compensated for the incremental costs they incur in financing and keeping such small transaction amounts.