Lin'an Ailun Electric Appliances Co. Ltd. (LAEA), established in 2001, is a small company with registered capital of 500,000 yuan and total assets of only 1.68 million yuan. Ge Chen, Executive Director of the company, says that development of the company has been restricted over the past few years due to the lack of capital. By borrowing money from friends and relatives, they have been treading water and missing varied business opportunities.

Now SMEs like LAEA can apply for loans from the China Construction Bank (CCB) or the Industrial and Commercial Bank of China (ICBC) through online credit transactions. Recently, LAEA, a member of alibaba.com.cn for the past four years, successfully procured 300,000 yuan in loans from CCB because of its record of integrity at the website.

On June 9, alibaba.com.cn and CCB jointly launched a loan project to small and medium-sized enterprises (SMEs). Four alibaba members including LAEA received a total of 1.2 million yuan in loans from CCB based on their online integrity record.

On June 29, alibaba signed an agreement with ICBC, which inks a cooperative deal providing financing services for online traders and for the construction of online payment platforms. According to the agreement, ICBC will provide financing services for traders on alibaba above a certain credit ranking in their business-to-business, business-to-consumer and consumer-to-consumer markets. Based on the online credit and transaction volumes of members of alibaba and its affiliated taobao.com, ICBC will provide credit rankings and launch a diversity of financing products, so that SMEs in e-commerce can obtain loans rapidly and conveniently. The financing service will first be introduced, on a trial basis, to Zhejiang Province which has the most vigorous SMEs in China, and will later be promoted to other regions.

This is the first time that e-commerce online credit in China has been partnered with bank loans and becomes an important reference standard for banks granting loans to SMEs.

Industrial analysts say that cooperation between alibaba and the banks not only provides innovative solutions to solving the financing difficulties of SMEs, but also helps to realize further integration of present banking resources.

Stranglehold on credit

At present, there are 29.3 million SMEs in China, accounting for more than 95 percent of the total number of Chinese enterprises. Their output value, tax payments and export volume contribute 60 percent, 40 percent and 60 percent, respectively, of the total for all Chinese enterprises. They also create 75 percent of all job opportunities in urban areas. SMEs have been an important and vigorous force for the national economy and are playing a strategic role in economic development.

However, the difficulty of securing financing has been a roadblock for the further development of SMEs.

Gao Jian, Vice Governor of China Development Bank, said that although loans granted to SMEs account for about 50 percent of the total loans granted by all Chinese financial institutions, the average loan that SMEs receive is only one 180th the amount large enterprises get.

In Gao's estimation, there are a number of internal factors contributing to the difficulty of financing SMEs. First, because of their small size, SMEs lack guaranteed conditions. Second, with easy market access, many SMEs have no core technologies and intangible assets, and their products are likely to be substituted, leading to poor business performance and difficulty in garnering external financing. Third, information about SMEs' business operation is harder to come by before financing and, even after getting financing, their business activities are not well known in the wider business community. Fourth, since most of the SMEs in China are privately owned, few have sound internal control mechanisms and accounting systems, and their financial reports cannot be relied on as entirely accurate.