Financing small business

Financing small business

Minister of Finance Mar'ie Muhammad received significant
political support for his campaign to promote new sources of
financing for small-scale firms in the provinces when President
Soeharto bought 10 shares worth Rp 10 million (US$4,580) in a
newly-established venture capital company in Yogyakarta on
Saturday.

Since early this year, Mar'ie has campaigned aggressively to
promote the establishment of venture capital companies in the
provinces in a bid to accelerate the development of small
businesses.

He apparently fully realizes that the requirement for banks to
set aside a minimum of 20 percent of their total lending
portfolios to small firms is far from adequate to support so
large a number of small-scale enterprises operating in numerous
sectors of the economy all across the country. Moreover, most
banks see lending to small enterprises as much riskier and much
costlier than loaning to medium-scale or large companies because
small firms usually have no fixed assets to secure bank credits.
Besides that, administering a number of small loans is obviously
more expensive than managing one large loan.

Because small-scale firms play an important role in generating
jobs and in broadening the base and strengthening the foundation
of the private sector, alternative sources of funding have to be
developed. In this context, venture capital financing is a very
attractive and viable proposition.

Thus far, five venture capital firms have been set up in
Bandung, Semarang, Yogyakarta, Surabaya (all in Java) and Medan
(North Sumatra). The more encouraging is this development because
all the venture capital companies have big businessmen, either
from the provinces or Jakarta, as shareholders. The one in
Yogyakarta is lucky to have President Soeharto, in his personal
capacity, as a shareholder.

Setting up a venture capital firm in the provinces is indeed
strategic in nature as most small businesses are located outside
of Jakarta. Local venture capital firms are naturally in a better
position than those in Jakarta to identify the small firms
qualified to obtain equity financing. Mar'ie, therefore, would
like to see not only every province but each of the regencies
with at least one venture capital company specializing in
financing small businesses through equity participation.

The participation of big businessmen as shareholders in the
venture capital firms is equally important because they usually
own many enterprises. Under this scheme, the venture capital
companies can eventually act as intermediaries in arranging
various forms of tie-ups between the small firms, in which the
venture capital companies invest equity funds, and the
enterprises of the big businessman shareholders.

Hopefully, the preparations now underway for the establishment
of venture capital companies in other provinces will receive the
full support of big businessmen. As the experiences of other
countries have shown, venture capital firms can serve as a very
effective mechanism to support small firms and start-up
enterprises with high growth prospects. Because the local stock
exchanges have been expanding, venture capital firms will not
find it difficult to obtain reasonable gains from their equity
investments.