it helps marking the "liaison" between two words. Try by yourself comparing the pronounciation between besm Allah and bismi'llaah or bismi'llaahi (which is the way we pronounce it, right ?)
When we transliterate Arabic words into foreign language we try to transliterate them the way they're pronounced more than the way they really look in Arabic. Like this example : the two Arabic words are somewhat merged into one (in the pronounciation of course).
Another example : al-rahmaan is better be transliterated as ar-rahmaan, because this is the correct way for pronounciation. And so on...