Explain what sources of finance are available for small to medium sized companies and explain why they sometimes face difficulties in raising finance

Topics: Debt, Corporate finance, Finance Pages: 7 (2357 words) Published: March 20, 2014
Explain what sources of finance are available for small to medium sized companies and explain why they sometimes face difficulties in raising finance 1. Introduction
The SME (Small and medium enterprise) sector is one of the crucial important contributor to economic growth in terms of Gross Domestic Product(GDP) and job creation worldwide(IFC,2010). According to OECD(2006), SMEs had created more than sixty percent of the job opportunities for OECD countries. That situation for developing counties are even more obvious. There is no doubt that the development of SMEs is closely linked to national economy. The growth of SME sector, however, presents a stalled tendency, even recession situation, owing to the deficiency of accessing to finance. This circumstance may restrict and hinder the development of small and medium-sized companies, then indirectly affect the country's economy. Therefore, how to financing efficiently and overcoming fund-raising barriers for its ongoing progress becomes a indispensable part and parcel of their operation activities. The aims of this article is to demonstrate what funds-raising techniques could be adapted by SMEs, then examine what obstacles are faced by them in the financing activities, and lastly, giving a conclusion.

2. Funds-raising sources available for SME
2.1 Internal financing
At the initial stage, SMEs have to obtain capital, internally, from owners, relatives, friends and existing partner or firm’s retained earnings (Abdulaziz& Andrew, 2013), inasmuch as the shortage of transparent and “hard” information, for instance, permanent track records from bank, financial statement, credit scoring as well as higher intangible assets. After that, they tend to seek alternative sources, such as external ways, for financing for the sake of its progress in the later phase.

2.2 External equity-based financing
External equity financing includes venture capital, business angels and public equity. In general, they are more suitable than debt for the young SMEs since they experiencing capital gap and unable to raise loans via security(Abdulsaleh & Worthington, 2013), inasmuch that equity capital has no special refund date(Ou & Haynes, 2006), and without mortgaging items for its supplier. A study written by Hogan and Hutson (2005) demonstrates the similar views that when TBSFs (technology-based small firms) suffering from information asymmetries, especially in its start-up stage, they would like to slove its capital gap through equity-based financing instead of debt.

2.2.1 Venture capital
Venture capital(VC) is the funds provided to firms at their early phase to exploit its business, thus investors intend to obtain long-term capital gains(McLaney, 2009). Nowadays, the high-tech small enterprises attract more attention to venture capitalist, as they are more likely to generate interests in a relatively short-term. And this can be illustrated by a study written by Bozkaya & Van (2008).It demonstrates that technology-based small enterprises obtain more money from venture capital than other sources of financing in European. Moreover, VC is a proper way for small and medium enterprise who were in the process of lack of permanent and effective track records and high quality of collateral (Abdulsaleh & Worthington, 2013 cited by Gompers, 1995).

2.2.2 Business angels
Business angels are direct investment launched by individual capitalist, rather than venture capitals who are mainly supported by investing institutions(McLaney, 2009). Furthermore, angels are not merely a kind of capital investing, also a participant investment. Investors tend to actively participate, in other words, in routine operations, such as enterprise strategic decision, strategic design as well as hiring managers.

2.2.3 Public equity
Public equity is a kind of relatively effective financing way for SME in a mature stage, it mainly is through the way of open recruitment to access to funds, and with equity as a...

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