“I need to get a loan to expand my small restaurant. However, many of the micro financing options charge interest rates that would kill my business. Regular banks ask for collateral that I don’t have. No one wants to sign as a guarantor for my loan. I’m getting very frustrated, because I know that if I got financing, my business would really take off. What can I do?”

The universal answer facing small business owners in search of financing is “No Collateral, No Deal.” If you’re an entrepreneur with a viable business idea or an expansion plan, at some point you’ve probably faced the challenges of raising capital without collateral.

There is an increased business-friendly focus in most of the commercial banks. With more people going the route of self-employment, it makes sense for financial institutions to pay closer attention to the development of the Micro, Small and Medium Enterprise (MSME) sector.

Small business can eventually bring big business in the long run.

Despite the best efforts of the banks to woo entrepreneurs, some business operators still complain that not much has changed in the process of securing financing. If you don’t have the backing of a guarantor or some tangible collateral, it’s very difficult to get more than a token amount of funding.

It’s understandable that lending agencies choose to proceed with caution, as they have to protect their depositors’ funds. Delinquent borrowers have only made it harder for honest, hardworking entrepreneurs to get ahead.

Laurence Adamson, consultant with the Corporate Finance Broker Unit of Jamaica Trade and Invest (JTI), explained that there are businesses that ‘bank hop’ for loans. “They rack up debt at one institution, default on the loan, then go to another bank for more money,” Adamson revealed.

There is currently no standard method of checking the credit worthiness of loan-seekers, unless they had previously done business with the institution. Therefore, to protect themselves, lending agencies may have to paint all prospective borrowers with the same negative brush. The good news is that there is now an initiative in place that will hopefully make it easier for small establishments to access funds.

A programme to develop a credit rating system for MSMEs was recently launched at the Technology Innovation Centre (TIC) at the University of Technology. With funding from the Inter-American Development Bank, the TIC, in association with the Institute of Law and Economics, will seek to devise a reliable system of judging the credit worthiness of small businesses.

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These entities, called the MSME Alliance, will first interview 20 small operators drawn from five trade groups including cosmetologists, hardware merchants and taxi drivers. The objective is to gather more information about their business practices and to assist them to improve their operations. The alliance will then seek to develop a standardised method of rating the stability and viability of each business for credit purposes.

Adamson was optimistic about the development of an MSME credit rating system. He noted that a credit bureau would allow banks to operate in an informed environment where they could know their customers better. “If the bank has information that the business is not indebted elsewhere, or has a good track record of repayment, it will be more likely to approve the loan.” The lending institutions would also be able to reduce delinquency rates by avoiding habitual bad debtors who would be tracked by the rating system.

The JTI consultant also indicated that the department was lobbying for the establishment of a Mutual Guarantee Facility that would be underwritten by the government. The proposal is that the government would guarantee a portion of the amounts loaned by financial institutions to MSMEs. Adamson explained that this would allow small businesses to get lower interest rates and easier access to funding, by removing some of the default risks involved in lending to the sector.

So if you’re a small business operator currently struggling to find affordable financing for your operations, take heart. Improve your credit rating by ensuring that you’re current with your debt obligations and that your bills are paid timely, and this might help to increase your ability to access loans in the future.