In the two and a half years since its founding, SMEloan has helped thousands of Hong Kong SMEs finance their operations and expansion. Now, the International Finance Corporation, a business arm of the World Bank, plans to invest US$20 million in SMEloan to help the company finance its expansion into southern China and the Asia-Pacific region.

SMEloan founder Ming Siu said the company is now in the process of creating a new technology process to work with a number of financial institutions around Asia to help them break into the SME lending business.

The move will be a strategic investment for financial institutions because they will need to decide if they want to commit to SMEs.

"If they do, we will be able to provide the tools to help them do that," he said. "Hong Kong will be a very unique place because we will not let financial institutions in Hong Kong have [the technology]. We don't want to be cannibalizing ourselves. So we will continue doing what we are doing here and in Mainland China."

Ming Siu recalls how difficult it used to be for small- and medium-sized enterprises (SMEs) to secure funding when he worked as managing director of a financial institution five years ago.

At that time, SMEs had no real access to capital because they needed collateral.

The relatively small amounts of money borrowed by SMEs also meant that the interest banks charged on a HK$1 to HK$2 million loan could barely cover administrative costs.

Banks may make about 5-6 per cent on a loan, but the amount of work to do this is no different from a HK$10-20 million loan. So obviously it makes good sense to focus on bigger loans.

Having identified a niche market, Mr Siu founded SMEloan in August 1999 with private equity firm Whitney & Co. The specialty finance company has since lent hundreds of millions of dollars to a market segment that financial institutions have traditionally shied away from.

SMEloan got around the problems associated with lending to small businesses by looking at why the traditional lending process was not working and then making it more efficient.

Its success is due in no small part to the Internet-based technology platform that it designed to originate and service loans to customers efficiently and effectively.

Over the last two years, the company has developed a model that underwrites loans, interacts with customers, and manages risk using an Internet-based technology platform.

"So instead of me hiring 50 officers to do a few transactions a year, we have this process to scale the operations," Mr Siu said.

"In the banking sector, you have one person handling 20 to 30 customers. If you have a few hundred customers, then that is not possible; you have to hire more people."

SMEloan's technology platform has cut its administration costs to the bone, enabling it to make a healthy profit where banks have struggled.

The system works like this. Customers apply for a loan online and input various information into the system which then goes through a scoring system. The overall score will determine how much money customers can borrow and SMEloan can usually disperse the loan in two or three days.

"Then every borrower will have a home page where they will supply us with information on their business. All this will go to our back-end system for screening and monitoring," he said. "Without the Internet this would not be feasible. It allows all our customers to get online and look at the Web to interact with us."

The system has built up a valuable database of knowledge about the needs and problems SMEs of various sizes and in different sectors face. Because customers are feeding the system information on their businesses, problems can be identified before it gets too late, he added.

Mr Siu said SMEs realize SMEloan needs to ensure its loans are safe, and therefore are quite willing to disclose information about their businesses. This trust also allows SMEloan to provide them with regular line increases.

The average approval rate for approving loans varies depending on economic conditions, but Mr Siu said it averages about 40-45 per cent, while the loan-default rate is 1.3 per cent.

Lending to SMEs is still considered a wildcard at the moment. 2001 was the first year that people actually started talking and doing something for the SME sector.