Research On Accounts Receivable Financing For SMEs Under Information Asymmetry

The survival and development of SMEs (Small-and-Medium enterprises) has beengaining the attention of the government, enterprises, and scholars. For a long time, thecommunity has been actively exploring the different ways to solve the problem offinancing SMEs. The research on this area has become a hot topic in academia, and ithas been on the agenda of the government for a while, which eventually led to theintroduction of "Property Law" and the “Registration of Pledge ReceivablesMeasures" in2007. As a result, accounts receivable financing business entered aperiod of rapid development, which played an important role to solve the difficultproblem of corporate finance. The practice in this area also proved that accountsreceivable financing is a viable and beneficial way of conducting enterprisedevelopment financing.However, from the experience of commercial bank accounts receivable financingbusiness development in recent years, commercial banks are still taking a verycautious approach when they try to provide debtors financing to SMEs. This is partlydue to the adverse selection and moral hazard problem caused by informationasymmetry between banks and enterprises. This new financing model failed to solvethe plight of SME financing issue: there is no radical change to the difficulties ofSME financing, and there is no satisfactory result among the commercial banks andSMEs of their desire to expand credit behavior between them. This is a departurefrom the original intention of the government and regulatory bodies, and does not helpwith the interests of the commercial banks to vigorously explore new SME customers.In the meantime, with the liberalization of China’s financial sector, new financialinstitutions and financial models are emerging. Many political and commercialguarantee institutions are founded. Insurance companies are gradually extendingcommercial credit insurance services. In addition, China’s social credit system is inthe process of continuous accumulation and improvement. All the above factors helpto improve the financing environment for SMEs, and indirectly help to eliminate orreduce the risk of information asymmetry, which cleared the way for commercialbanks to carry out SME accounts receivable financing business.This paper started with the credit rationing issue caused by the risk of informationasymmetry between banks and SMEs. It then analyzed root cause for the adverseselection and moral hazard in accounts receivable financing. In addition, this paperproposes three new approaches to solve the problem, i.e., by proposing newinnovative models on trade receivables financing, by the introduction of third-party credit system, and by the development of relational financing. With the approachesmentioned above, we believe they can help achieve the goal of speeding up the paceof accounts receivable financing for SME by improving receivables financingsituation for SMEs in the existing framework by reducing the risk caused by theinformation asymmetry.