Small businesses cry foul at lenders - But DBJ says loans tailored for every operator
Bureaucratic protocols and inflexibility at commercial banks and the Development Bank of Jamaica have been cited by micro and small entrepreneurs as stumbling blocks to innovation and expansion, denying them capital for deeper investment.
According to president of the Small Business Association of Jamaica (SBAJ), Hugh Johnson, one of the major challenges in starting a business is securing financing, and MSMEs are finding it very difficult to make the grade.
“Hard is an understatement. It is very difficult. First, the whole loan process, coupled with the onerous requirements, and I would say a lack of understanding, banks need to understand more about business operations,” said Johnson.
“It is a problem because there is a mould that the bank has that if you can’t fit into that mould, you will be rejected, and we are saying that there are other jurisdictions that offer loan financing to small-business operators and it is not all that onerous, but because of the banks’ dominant position, you are at a disadvantage. So if you want to get in, you will have to fall in their line, and I’m saying their line is not always conducive to productive engagement,” said Johnson.
Another issue plaguing the sector, said the SBAJ president, is the repayment structure.
“They don’t have the products aligned to the business. There are moratoriums on some loans – they might give you two months, three months, six months, it all depends on the project. But their mould is a monthly payment, so if your revenue stream affords you revenue every six months, even if you get every two months’ moratorium, you still have to be paying on a monthly basis when your revenue is not on a monthly basis.
“Those are some of the challenges, and because banks are making enough money operating the way they are, they are not willing to change, so that principle alone, when you would have gotten involved with a bank immediately, you are at a disadvantage, and your loan will go bad easily because of what is required and your affordability to repay,” said Johnson.
He told The Sunday Gleaner that even when clients bypass the banks and head to organisations like the Development Bank of Jamaica (DBJ) for assistance, the process is still difficult, oftentimes even worse.
“As it relates to their efforts and all they are doing, they are just going around in circles, because the personnel there, they don’t understand developmental lending, and sometimes I think the DBJ is just another bureaucratic hurdle, even worse than the commercial banks themselves.
“The requirements are still onerous. They don’t make the process any easier; it’s harder, even though at the end, you might get some help, but if you were going it on your own, finding your own formula at the end of both, when you compare them, sometimes I think you would be better off going it on your own because of the time that it took to be successful at DBJ,” said Johnson.
Despite the challenges, entrepreneurs have still been prepared to launch out into business. Johnson added that he would encourage small operators to do equity financing and not loan financing.
When The Sunday Gleaner contacted executives at the DBJ, they rubbished Johnson’s claims that the development bank’s process was harder, and sought to assure that numerous systems were in place to offer seamless transition to MSMEs.
“As a development bank, one of the major planks of our current strategy is focused on seeing how we can help the MSMEs not only access financing, but I think even more importantly is to try and facilitate them so that they are in a position to access financing,” said Milverton Reynolds, managing director of DBJ.
“One of the things that we have discovered is that a lot of micro and small businesses are not able to access financing, so when they go to a financial institution, for example, they are not prepared. They don’t have financial statements, they might not have a business plan, they don’t have a marketing plan, so we facilitate them by providing the services that would enable them to access financing.”
Reynolds urges small and medium-size businesses to emerge from the shadows of informality and get registered, although that is not a stipulation for microbusinesses.
The DBJ also denied Johnson’s assertion of a “one-size-fits-all policy”, arguing that each loan and repayment plan is tailored for the client based on needs.
“Not every loan you have to pay back monthly. Some you can pay back quarterly, some you can pay back every six months; it depends on the terms and the type of business that you have, and I would say most financial institutions will not give you terms that won’t meet your cash flow. The terms will match your actual business activity,” said Christopher Brown, general manager for the Strategic Services Division.
General manager for the DBJ’s Microfinance Services Division, Paul Chin, said lack of awareness of the full scope of offerings from the development bank was a major hurdle to small business operators.
“A lot of micro and small businesses are not aware what is happening out there in the space, so I believe there is an issue as to how much people know about us. We have increased significantly our outreach and our presence in the market over the last two years and a lot of small businesses are now realising exactly what the DBJ has to offer, and that it’s just not as difficult as some people say,” said Chen.