SMALL and medium-sized enterprises often face difficulties obtaining bank loans. Below are four hypothetical situations that companies may find themselves in, with expert advice on what they should do.

Currency risk:

A company buys in US dollars but sells in Australian dollars. It made pre-tax profits of 5 per cent in 2006 and 2007, but incurred a 20 per cent loss last year. Banks are unwilling to lend despite a good order book for this year.

Ms Lei Yu, vice-president of risk advisory company Marsh Singapore, said that while both currencies are stable, trading in two currencies is insignificant.

However, 'when an economic crisis hits, the currency market becomes volatile - a small problem can cause huge losses'.

Hidden operating costs:

A company has made a positive gross profit in the three years it has been in operation. However, high operating expenses have caused it to incur losses for all three years.

Ms Lei said the company is likely to be overlooking hidden operating costs because it thinks its profit margin is high.

'In this case, it must look into its business cost structure and analyse it line by line to figure out how it is losing money.'

Poor cash-flow management:

A company is in the minimart business, with a chain of five profitable outlets. It receives payment in both cash and cheques, but does not bank in these regularly and gets, on average, five returned cheques a month.

Mr Peter Chan, managing director of private equity firm Crest Capital Partners, said: 'This is a case that reflects very poor cash-flow management, and for SMEs, cash-flow management is a critical survival skill set.'

He added that the company should find ways to differentiate itself from its competitors, as the market it is in is relatively saturated.

Political instability:

A company imports products from Iran, the United Arab Emirates and Africa. It exports mainly to China, India and South-east Asia, but also to Myanmar and North Korea. It has averaged a net profit of 4 per cent for the past two years, but still has not been able to secure credit lines.

Ms Lei said a possible reason the company was unable to secure credit lines was that some of its trading partners are politically unstable.

'I would recommend the company explore political risk insurance, and demonstrate to the bank that it has such coverage.'

LINETTE LAI

This article was first published in The Straits Times.