FINANCING hag remained a problematic area for owner-managed                                                                                           
businesses in Malaysia. This was reflected in a recent                                                                                                
survey jointly conducted by the Malaysian Institute of                                                                                                
Management and Shamsir Jasani Grant Thornton.                                                                                                         
                                                                                                                                                      
With the pressures of globalisation and new technology fast                                                                                           
setting in, many family businesses face the harsh reality                                                                                             
of having to revamp themselves, improve facilities and                                                                                                
upgrade their human resource skills and competence if they                                                                                            
are to stay competitive.                                                                                                                              
                                                                                                                                                      
All this requires funds. However, family businesses are                                                                                               
generally relatively small and uncertain in profit                                                                                                    
sustainability. Thus they often find limited avenues to                                                                                               
obtain funding for their businesses.                                                                                                                  
                                                                                                                                                      
The survey also found that the majority of small and medium                                                                                           
family businesses use mainly family funds for business                                                                                                
development. They rely less on funding from the financial                                                                                             
institutions than the larger enterprises do.                                                                                                          
                                                                                                                                                      
There are a number of reasons for family businesses to                                                                                                
confine funding to only family members. One is their                                                                                                  
concern about losing control if they were to involve                                                                                                  
outsiders in financing the growth, of their businesses.                                                                                               
                                                                                                                                                      
In fact, more than half (62 per cent) of the small-scale                                                                                              
enterprises surveyed expressed this concern.                                                                                                          
                                                                                                                                                      
Another reason for family businesses not seeking funding                                                                                              
outside the family, has to do with their founders. They                                                                                               
generally lack the technical education, first-hand                                                                                                    
knowledge and, experience in s6curing financing.                                                                                                      
                                                                                                                                                      
As a result" they face difficulty in obtaining the                                                                                                    
necessary funds and are often unaware of the availability                                                                                             
of the many government-assisted fundings.                                                                                                             
                                                                                                                                                      
As growing a business requires continuous funding, the                                                                                                
founders need to overcome their weakness in and their                                                                                                 
attitude toward financing. They need to acquire a good                                                                                                
foundation in financial management to enable them to                                                                                                  
understand the risks and trade-offs, to look out for, as                                                                                              
well as how much money to get and from whom.                                                                                                          
                                                                                                                                                      
Developing a fund-raising strategy and obtaining funding                                                                                              
can be a hazardous task. It can commit the company to                                                                                                 
actions that incur costs and consequences that may enhance                                                                                            
or inhibit future financing efforts as well as the                                                                                                    
stability of the company.                                                                                                                             
                                                                                                                                                      
Each source of funding has particular requirements and                                                                                                
costs, both apparent and hidden, which have serious                                                                                                   
implications for the future of the company.                                                                                                           
                                                                                                                                                      
Also, the availability, the amount and the cost of each                                                                                               
source of funds will depend on the stage of the company's                                                                                             
life cycle and the potential of the company.                                                                                                          
                                                                                                                                                      
Sourcing equity funds: Usually, funds from family and close                                                                                           
friends will become insufficient to meet the financing                                                                                                
requirements generated beyond the early stage of a                                                                                                    
business.                                                                                                                                             
                                                                                                                                                      
Giving up part of the control of the business may be a                                                                                                
small price to pay in exchange for business growth through                                                                                            
injection of equity funds from ' outsiders.                                                                                                           
                                                                                                                                                      
However, founders of businesses are often at a loss as to                                                                                             
where to find these investors.                                                                                                                        
                                                                                                                                                      
In Malaysia, as in most other countries, there are many                                                                                               
high net worth individuals who are looking for ways to                                                                                                
invest their surplus funds. They could be professional                                                                                                
advisers, business acquaintances, past employers,                                                                                                     
customers, suppliers; and professionals like doctors and                                                                                              
architects.                                                                                                                                           
                                                                                                                                                      
These investors are an important and suitable source of                                                                                               
fund for the development stages of high potential firms and                                                                                           
the early stage financing of medium-scale family business                                                                                             
firms.                                                                                                                                                
                                                                                                                                                      
Unlike venture capitalists, they are not that rigorous in                                                                                             
their evaluation and stringent in their requirements,                                                                                                 
especially when investments are only between RM50,000 and                                                                                             
RM500,000.                                                                                                                                            
                                                                                                                                                      
Most are prepared to, invest in a business on the basis of                                                                                            
personal relationships with the founder or if ,the founder                                                                                            
can convince them of the potentials of the business.                                                                                                  
                                                                                                                                                      
To widen the access of family firms to these investors,                                                                                               
professional firms like accounting and legal firms may                                                                                                
consider maintaining a register of their wealthy clients                                                                                              
who are interested in, such opportunistic investments and                                                                                             
match them up with businesses looking for sources of equity                                                                                           
funds.                                                                                                                                                
                                                                                                                                                      
In the US, these wealthy individuals, who invest more or                                                                                              
less regularly in start- up or early growing firms are                                                                                                
called "angels."                                                                                                                                      
                                                                                                                                                      
Many of these "angels" have become millionaires from their                                                                                            
investments in family firms which have grown into sizeable                                                                                            
firms like McDonald's, Hewlett Packard, IBM, Apple and                                                                                                
Microsoft.                                                                                                                                            
                                                                                                                                                      
If the Government is convinced that family firms are an                                                                                               
important engine of economic growth, it will examine ways                                                                                             
to spawn the growth visibility of similar "angels" in                                                                                                 
Malaysia like it is doing for venture capitalist firms.                                                                                               
                                                                                                                                                      
Problems in sourcing debt financing: There are cases where                                                                                            
the founders, unwilling to sacrifice part of the equity to                                                                                            
outsiders, actually finance their business with a great                                                                                               
deal of debt.                                                                                                                                         
                                                                                                                                                      
While this may be possible although unlikely, it is unwise                                                                                            
to do so. A new and growing company is a consumer of                                                                                                  
capital and can ill afford to make regular payments of                                                                                                
interest and principal required with debt financing.                                                                                                  
                                                                                                                                                      
Many businesses that are heavily debt financed find                                                                                                   
themselves constantly undercapitalised and have continual                                                                                             
cash flow problems. These problems will doubtless occupy                                                                                              
the time and attention of their management to the detriment                                                                                           
of the, development and growth of the business.                                                                                                       
                                                                                                                                                      
Many new and growing firms in the survey also expressed the                                                                                           
difficulty of obtaining finance facilities from financial                                                                                             
institutions, especially in the first three years of their                                                                                            
existence.                                                                                                                                            
                                                                                                                                                      
This probably explains why some of the small and                                                                                                      
medium-scale businesses in the survey rely less on funding                                                                                            
from financial institutions than the large-scale                                                                                                      
enterprises.                                                                                                                                          
                                                                                                                                                      
The Malaysian Government has, over the years, established                                                                                             
numerous funds and grants to help small and medium- scale                                                                                             
firms commercialise their research and development, improve                                                                                           
their competitiveness and develop new markets in emerging                                                                                             
countries.                                                                                                                                            
                                                                                                                                                      
Yet many family firms, especially the small and                                                                                                       
medium-scale in the survey, complained about the problem of                                                                                           
securing, funding for their businesses.                                                                                                               
                                                                                                                                                      
This could only suggest that they are not aware that these                                                                                            
funds and grants are available to them. Or they have                                                                                                  
difficulties making out their applications to comply with                                                                                             
the processing procedure. Or it could even be that the                                                                                                
approving criteria are too stringent.                                                                                                                 
                                                                                                                                                      
This suggests that the governing agencies administering                                                                                               
these funds and grants could help by reviewing their                                                                                                  
application and processing procedures and approving                                                                                                   
criteria and making them more customer friendly.                                                                                                      
                                                                                                                                                      
Ways could be found to educate, the family businesses on                                                                                              
the availability of these grants too. On the same note, the                                                                                           
chambers of commerce and other trade associations might                                                                                               
organise seminars to inform their small and medium-size                                                                                               
members on these funds and grants and possibly train them                                                                                             
to evaluate their eligibility and how to make out their                                                                                               
cases to get these funds and grants.                                                                                                                  
                                                                                                                                                      
Some family firms also complained of delays in getting                                                                                                
their applications processed by financial institutions.                                                                                               
Some had had their applications rejected.                                                                                                             
                                                                                                                                                      
Bank Negara Malaysia's initiative in requiring banking                                                                                                
institutions to publish a Client Charter goes a long way                                                                                              
towards facilitating family firms in applying for loans to                                                                                            
finance their business. The Client Charter, which                                                                                                     
stipulates the documents and information needed by banking                                                                                            
institutions to process a loan application, also includes                                                                                             
the eligibility criteria for obtaining loans, the                                                                                                     
definition of project viability and the time taken by the                                                                                             
banking institutions in processing a loan application.                                                                                                
                                                                                                                                                      
This will make family businesses better informed and adept                                                                                            
at providing the necessary information to expedite the                                                                                                
processing of their loan applications as well as save them                                                                                            
the bother of applying for loans that will not be approved.                                                                                           
                                                                                                                                                      
Small to medium-size industries (SMIs) are among the                                                                                                  
driving forces in the economic growth of a country.                                                                                                   
                                                                                                                                                      
They provide important link ages to export-oriented                                                                                                   
industries and are often the predecessors of big successful                                                                                           
firms in addition to providing employment to a large                                                                                                  
portion of the workforce.                                                                                                                             
                                                                                                                                                      
Therefore, SMIs, particularly family firms, should not be                                                                                             
handicapped or starved in securing funds, a key resource,                                                                                             
to business growth.                                                                                                                                   
                                                                                                                                                      
Government initiatives and efforts by the chambers of                                                                                                 
commerce and business associations are important approaches                                                                                           
which will help to eliminate a key hindrance to the                                                                                                   
progress and growth of the family firms among the SMIs.                                                                                               
                                                                                                                                                      
Indeed, such support should be sustained if family firms                                                                                              
are to contribute significantly to the country's economic                                                                                             
growth.