Financing for SMEs available on Junior Stock Exchange
THE issue is one of constant concern to small businesses, indeed, it is especially crucial to growing companies that need more than talent and a good idea to remain viable. And on Wednesday, the Mayberry Investments Limited Investor Forum provided fertile ground for a discussion on the available options for financing of small businesses, chief among them, listing on the Jamaica Junior Stock Exchange (JSEjnr).
The topic was ably explored by speakers who were on the receiving and giving end of equity financing, as well as the principal of the Jamaica Stock Exchange (JSE), the largely untapped financing option for the Small and Medium Enterprises (SMEs).
General manager of the stock exchange, Marlene Street Forrest, noted that small companies can list on the Junior Jamaica Stock Exchange in order to “access no-interest capital”.
“The stock exchange was conceived to allow for small and medium-sized companies to benefit from equity capital. It will allow for companies to expand and to also compete, compete not only locally but globally and regionally,” Street Forrest said.
Even though debt financing, in the form of loans from financial institutions, was offered as an alternative, the most attractive option seemed to be that of equity, especially in the context of Jamaica’s high interest rates environment. It was a point of contention during the discussion segment, when small business owners decried the need for lower rates of interest on development loans. Street Forrest, in her presentation however, offered the option of equity financing for those who are open to relinquishing some ownership interest in their businesses.
“In markets where you will have high interest rates and your competitor will probably have regionally lower interest rates, it is not a level playing field. Therefore there is a definite advantage in coming to market to access that no-interest capital,” Street Forrest said.
There are requirements, however, some of which many small companies have a hard time meeting. The prohibitive costs of some of these requirements, including the advice of stock brokerage firms, accounting professionals and legal representation, proved another issue for the business owners present. However, it was pointed out that the benefits of listing far outweigh the costs and, in fact, some of these stipulations are also required by lenders.
“It is important to talk about the bridge from debt to equity, because when a company borrows, the requirement of a bank is usually that you have financial statements and that is good, because in a sense it is paving the way for a company to come to market. Because that company cannot come to either the main market or the junior market without having proper accounting records,” Street Forrest said.
“There are disciplines which must be adhered to for listing,” Street Forrest added.
“Since 1969, 42 companies have delisted. Out of those 42 companies that have de-listed, we have only four of those companies around today. I don’t think I need to expand on what that says. That there is a certain discipline, and listing on the exchanges and continuing to list provide a certain longevity that companies that have de-listed are not forced to continue and as a result of that many times it is to their detriment,” she added.
Currently, only Access Financial is listed on the Junior Exchange. Marcus James, CEO of Access, lauded the input of equity investors in facilitating growth of his nine-year-old company.
“Listing Access has always been one of our strategic objectives,” James told the gathering. “The decision was made to list the company as it would allow us to raise additional capital to facilitate expansion of our branch network and loan portfolio. We also recognised that the company’s profile would be enhanced and this would impact greatly on our marketing efforts,” James said.
Access will be opening three new branches in Santa Cruz, Linstead and Portmore, by the end of the year.
Gary Peart, CEO of Mayberry Investments Limited, financial advisory firm and equity investors in Access, added that if the firm had not listed the planned branch expansion would have had to take place over three years, instead of within a few months.
In addition to the capital inflow, listed companies enjoy a high profile and market visibility, the benefits of benchmarking — which is important to international investors — and tax concessions.
Companies listing on JSEjnr get a 10 year concession. No taxes are paid for the first five years, while in subsequent years only half the corporate tax applicable at that time is paid. There are also no taxes on share transfers or dividends. However, the company must raise share capital of between $50 million and $500 million through an initial public offering (IPO).
“The tax holiday is an important gain,” Maureen Webber, CEO of Development Options Limited, explained. “It takes about five years to make anything when you are a small firm, the ability to retain your profit to fall back in the business is an important gain.”
She noted that companies should also consider the marriage of debt and equity options within the appropriate business contexts.
“If you are in the R&D mode then equity is critical for you. If you are moving to another level, again equity is important. If you need strong governance, its equity you’re looking at. If the cost of capital is too high, equity is an option. If it is low and fairly stable, then you can have debt. If you can afford the payments then go for debt as well,” she said.
“It is not debt versus equity. It is debt and equity and finding out at what point in time you find the right mix for yourself to grow your business.”