Missmatch in SMEs funding

Empowerment of Small and Medium Enterprises (SMEs) always receive considerable attention, because of its role in sustaining the prosperity and economic growth of Indonesia. SMEs have a proportion of 99.99% of the total number of business operators in Indonesia or 52.76 million units. It absorbs up to 89.2 percent of the total workforce, provides up to 99 percent of total employment, contributes 60.34 percent of total national GDP, 14.17 percent of total exports, and 58.18 percent of total investment.

Although it has shown its role in the economy, up to now SMEs still face various problems, both internal and external. The Academic Study of Bank Indonesia presents that the development of SMEs still faces obstacles, especially in accessing costs from the banking sector. SMEs constraints on bank credit can be viewed in terms of demand and supply. From the demand side, SMEs have quite unique characteristics, namely not having transparent and organized financial information, so that credit providers have difficulty in obtaining information about financial and business conditions. This can create difficulties for banks in minimizing the risk of defaults on loans extended to SMEs. In terms of credit supply, banks' reluctance to provide loans to SMEs is mainly due to limited assets that can be used as collateral, business uncertainty in the future, weak financial management, and lack of track records.

The government has sought to provide a variety of formal and informal funding that is more easily accessible to SMEs, including the Financial Services Cooperative, venture capital, grant funds, revolving funds through the Revolving Fund Management Institute, and the People's Business Credit, but in practice there are still many SMEs facing difficulties in accessing funding, among others due to strict regulations, the number of needs that are not appropriate, the cost of capital is too high, the period is too long, limited access to information, and the financing system is not according to needs.

Every business experiences stages of development and each stage requires a different source of funding, due to differences in size and risk of the company. The stages of business development based on entrepreneurial life cycle successively are ideas, startup, early growth, expansion and maturity. Financial chains, on the other hand, show the suitability of funding types with the stage of business development. Initial capital in the idea stage until startup is generally obtained from informal funding sourced from "love capital", namely from the founders and angel investors such as family and friends. Funding for the early growth to expansion stage comes from venture capital and the expansion stage to maturity using funding from commercial banks or conducting an IPO (Initial Public Offering) in the capital market. The amount of investment required for business development usually increases during the company's life cycle, where risks and financial challenges decrease at the maturity stage. Venture capital, bank and capital market funding is formal funding and is usually only available for the next stage of development of startups.

So far, SMEs in Indonesia with various weaknesses and limitations are forced to be faster able to access formal funding such as banking. While it is difficult for banks to simplify requirements and violate the precautionary principle to help finance high-risk SMEs. Based on this phenomenon, it can be said that the funding strategy of Indonesian SMEs so far has experienced a mismatch. To overcome this mismatch, a special informal funding scheme for SMEs by non-banking institutions is very important to be pursued as a form of support for novice entrepreneurs. Community participation is expected to be able to bring up ideas, ideas and ideas that are innovative, creative and forward-looking as a driver of progress.