Introduction
This paper will focus on the current economic state of the UK after the global economic turn down. The global economy is just recovering from the global economic crisis that resulted from the high debt burdens on the consumer following the “easy money policy” (Hm Treasury, 2009). This paper assesses the root causes to the slump in the global economy, its impact, and particular implications of the crisis to the UK economy. Other areas that will be focused on will include strategies that the UK policy makers have developed in response to the crisis and the possible funding options available to UK entrepreneurs just after the severe heat of the global financial crisis.
Current Economic Context in the UK because of Global Financial
Crisis
Following the global turn down, which rocked the world economy in 2008; economic analysts have propagated non-ending debate on the root cause of the crisis (Hm Treasury, 2009). Some link the crisis to what has largely been described as an irresponsible act of the consumers to take on uncalculated risk. Other analysts point out greed as the major cause of the problem in which those who created the huge debt burden accused of developing unworkable means debt financing, solely driven by greed (Great Britain Treasury, 2008).
These lead to excess liquidity that was continuously supplied to the “global financial markets by the major central banks” (Great Britain Treasury, 2008). The Neo-liberalism philosophy has also come in the limelight as the root cause of the crisis. This phenomenon is said to have caused globalization of capital, enabling banks and other major financial institutions to borrow, lend and provide collateral. Effects of the current financial crisis which started out in the US in 2007 are estimated to spread out to each individual throughout the world (Shemilt etal., 2010). Financial institutions greatly contributed to the crisis by encouraging households to take up credit beyond what they can afford to repay. This resulted into huge profits to the financial institutions at the expense of the borrowers-who are the majority (Lawrence, 2009).
Trigger of Financial Crisis and Its Impact on the World Economy
There is a clear indication that the global financial crisis caught the world unprepared. Yet this is not supposed to be case considering that the crisis was started by a group of financial institutions that developed appealing lending rates to borrowers. The appealing rates to mortgages and loans lead to an increase in the number of borrowers from the financial institutions (Mishkin, 2008.). What is expected from this scenario in the end is an increase in cash flows the moment borrowers begun servicing the loans at increased interest rates. Financial institutions failed to set up plans to obtain money to cater for a clearly eminent rise in interest rates.
The borrowers’ income was all-constant in the face of the increase in the interest rates, suggesting an unbearable burden to the borrowers. It meant digging deeper into an already leaner income to service the debts, this combined with the borrowers low saving culture culminated into a severe financial crisis. Borrowers were forced to cut expenses on basic needs such as food, clothing shelter, medical care and entertainment in order to service the loans. Mishkin (2008) suggests that about “$ 1 trillion contracts were reset in 2007 and 2008, resulting in an estimated increase of 31% in cash flow towards loan servicing.”
The “policy of easy money” as pointed out by Siebert (2007) only served to increase money in the pockets of those who propagated the policy. Siebert (2007) suggests that the originators of the “easy money policy” should instead have emphasized an increase in the volume of transitions in order to earn their profits rather than target profits from increasing the interest rates. This policy retained money at the top of the pyramid and had very little impact to the people at the bottom of the pyramid in terms of development (Crandall, 2009).
The target of high profits by financial institutions later changed when the situation turned worse. The institutions were forced to write off several loans and concentrated on ways of improving their falling financial status (Crandall, 2009). The effect of this spread a financial implication both to the local and global economy.
Specific Implications of the World Collapse for the UK Market
The effects of the global economic crisis have been so severe, leading to the “collapse of the world’s major financial institutions” (Bryant, 2004). Competitors at relatively low prices have acquired the once stable financial institutions; governments have in some cases had to step in by bailing out such institutions to keep them going. This has a negative implication to the taxpayers’ money. Bryant (2004) indicates that the UK government together with other European governments has spent well “over $2 trillions on bailouts and rescue packages.” This is a substantial amount of money that would rather be spend on developmental projects to improve the economy instead of being spend on bail out packages.
Since the financial problem emanated from financial institutions such as banks, there has been an effect to the flow of money in economies. Considering the major role that banks play in the circulation of money especially in the current global economy, the credit crunch instituted by banks is bound to affect the business community. Banks have resorted to reduce access to credit by entrepreneurs who incidentally need the credit to develop and expand their enterprises Bryant (2004). Those that are still willing to provide loans have raised interest rates making them inaccessible to the borrowers.
Because of cutting down budgets by various institutions, industries and agencies, unemployment continues to sore high in the UK. There has been in increased discontent by investors, and increased lack of confidence in the banking system. The UK government has had to nationalize some banks in order to restore the confidence of the investors in the banks (Spero and Hart, 2009). Many people are worried of further collapse of the banks, hence fearing to invest in the banks. The housing market has not been spared either. There is a sharp fall in the housing market following the financial crisis that resulted in the credit crunch (Spero and Hart, 2009).
The UK’s Response to the Crisis
It was established that the UK’s debt crisis following the global economic turn down posed a severe risk to the banking section. As a wake up call from the severe economic slump, the UK government has been developing plans to avoid yet another financial crisis (Davies, 2010). Top on this agenda has been to establish reasons why the banks are not advancing credit as much to entrepreneurs as they had done previously. Another call has been to develop mechanisms to enable banks to lend to entrepreneurs in 2011/12 (Davies, 2010).
Rather the increased uncertainty in making returns has been cited as a major hindrance for businesses to take credit from banks. Banks have been put to challenge to raise their own equity capital by reducing the amount of lending (Lannoo, 2008). Unlike the US, the UK has been accused of taking a rather relaxed approach to avert the effects of the financial crisis to its economy.
Among the strategies lined up to revamp the economy in the aftermath of the global financial crisis include; developing a sound financial system that is capable of delivering targeted financial functions. Strict reforms target to strengthen the banking system against shocks of financial crisis. There is more emphasis on creating more wealth during the favorable financial times to act as a cushion in the lean days.
Another reform is a deliberate attempt to make big banks highly stable to prevent them from collapse incase of possible economic slump. Lannoo (2008) also suggests that the government shall work on “reducing related over the counter derivative markets.”
Problems in obtaining finance to start new business
New business start-up face a number of problems related to financing; the problems vary widely according to the geographic location of the enterprise or the entrepreneur. The most prominent has always been lack of collateral (Sena, 2008). As a new enterprise, there is always less or no security against the loan. As a result, borrowers are denied funds or given less than what is requested.
Cultural issues also play a major role in the perception of entrepreneurs towards bank loans. Sena (2008) points out that the blacks and other minority ethnic groups tend to shy of from bank loans for fear of a perceived mistreatment by the bank based on their racial status. Similar findings also indicate that people who live in marginalized areas of tend to disregard themselves from bank loans. They regard themselves poor to be given credit by the banks. Women have also been pointed out as a disadvantaged lot of borrowers based on self-perception (Storey, 1982).
There is also the aspect of networking between aspiring entrepreneurs and existing ones. Often existing entrepreneurs tend to be repulsive to aspiring entrepreneurs probably viewing them as a threat or competitors (Storey, 1982). New business start-ups require guidance on how to run the business and where to get finance. This information can be readily obtained from existing entrepreneurs if they network.
The issue of age has also featured much among problems in accessing finance for small business start-ups. Young college graduates have been singled out as fearing credit for business purposes (Storey, 1982). This is generally because of the student loan, which is given first priority before going for extra loan for business purposes.
Sources of funding available for entrepreneurs
Always regarded a major hurdle to beginning a business by entrepreneurs, capital has remained a challenge to many would-be entrepreneurs. Yet analyst’s points out that it is not all about capital but an idea. True as put a lucrative idea will always get funding from investors. There are several funding options available to aspiring entrepreneurs with profitable business ideas. The funding can be inform of either a grant or a loan from banks, angel investors or venture capitalists (Fredrick and Hegarty, 2006).
Different banks provide seed capital to aspiring entrepreneurs after evaluating the viability of there business ideas. The HBSC is one among the banking institutions that have for long supported business start-ups by providing start-up capital (Syrett, 2008). The bank lends out between £1,000 to £25,000 payable in a period ranging from 1-10 years (Syrett, 2008). Borrowers are expected to agree to the terms and conditions of the bank that includes opening a current account with the bank, agree to pay back at the interests rates indicated.
Lloyds TSB also offer financing solutions for business start-ups and growth. The institution provides both short tern and long term loans for business financing. The credit products offered by the bank are in terms of loans and overdrafts (Cappie, 2010). The products are deemed flexible to fit client’s business needs. The amount borrowed varies largely depending on the business requirements.
Banks often require security for the loan advanced, the security is always in terms of property also referred to as collateral which acts as a guarantor to the loan. Angel investors provide relatively friendlier terms which are relatively attractive to borrowers afraid of listing their property against the loan. The funds are often provided on the basis that the investor is entitled to a percentage share in the business. Angel investors take “a gambling risk by investing in the business idea by hoping that the business will grow fast for them to regain their investment and profit” (Cappie, 2010).
Venture capitalists also provide an alternative to business funding whether at start-up stage or even for those seeking to expand there ventures. Venture capitalists also give funds against the business and not assets as collateral. The most prominent venture capitalists in the UK are the advantage early growth fund (Plunkett, 2007). Venture capitalists inject their funds in the start-up of business ventures and take part in the running of the business for a specific period of time. At the elapse of the stipulated time frame when the venture capitalist is deemed to have recouped their investment, they exit the business and leave it to the owners.
Grants from governments and other agencies also provide a good source of business funding (Plunkett, 2007). Grants are often free start-ups, government and non-profit agencies identify business ideas targeting to benefit particular groups or promote government policies and fund them through grants. A viable proposal is always a requirement for such grants, the proposal provides a clear roadmap how the funds are to be spend to achieve the project objectives.
Of all the sources of capital, the most neglected but important is personal savings. An entrepreneur with a burning idea does not consider capital as a hindrance to attaining his objectives. It is important for anyone aspiring to start a business to be able to establish a saving scheme to enable him attain the dream. Being able to save for capital is the first indication that one can be able to run the business with commitment.
Bootstrapping Techniques
Bootstrapping techniques refer to business techniques employed by entrepreneurs especially during the lean times to minimize spending (Zoubir and Iskander, 2004). This involves mechanisms that reduce the budgetary allocations to various business activities. There are various techniques entrepreneurs use to achieve this objective. This paper looks at six common bootstrapping techniques, which either emphasizes looking out for cheaper options, free options or delaying expenditures. These include; owner-financing, minimization of accounts receivable, joint utilization, delaying payment, minimizing inventory, and grants (Zoubir and Iskander, 2004).
Bootstrapping is a sure way to reduce expenditure to the business, reduce business risks and implementation time. Bootstrapping also helps entrepreneurs to focus on their set goals and strategize how to achieve them (Chirnick, 2008). The main objective in bootstrapping is to reduce expenditure and increase income. This means a bootstrapping entrepreneur has to identify and focus only on techniques that enable them save. Most of such techniques require doing much for yourself rather than spending money on consultants. By doing it yourself, you learn even more through experience on how best to run the business at a profit. Besides, as pointed out by Chirnick (2008) bootstrapping saves the business from repaying borrowed money, incurring the high lending interests and can also be a source of confidence to lenders to the business in future.
Owner financing: this is where an entrepreneur carries part or all costs of financing a business. Sources of such financing include; personal savings, use of credit cards, and donations from friends or family members. This approach enables an entrepreneur to start and run a business with his or her own raised capital rather than relying on capital raised from “external sources such as banks, angel investors or venture capitalists.” (Davis, 2004)
The major benefits of owner financing is that it is less stringent compared to other lenders. It is also more flexible. Davis (2004) indicates that the involved parties always agree on the best payment modalities that suit them, they can agree on either; interest only, fixed rate amortization, less than interest or balloon payment.” This way, the interest rates can be altered from time to time to fit the comfort of the buyer.
Minimization of accounts receivable: This technique is implemented through factors, termination of business relations with defaulting customers and giving booty to those who pay faster. Willcocks (1994) defines factors as an approach in which “a business sells its invoices at a discount and uses the proceeds to grow its venture.” The assumption in this case is that the profit gained from the sale of the invoice is higher than the invoices.
Joint utilization: This bootstrapping technique promotes sharing of various facilities in the business organization to reduce the cost of exclusive use of facilities. Some of the facilities shared in this case to reduce costs include; office space, office equipment, supplies, and employees (Willcocks, 1994).
Delaying payment: this technique embraces use of alternative ways of ownership to reduce costs. This includes; leasing of machines and equipment for example instead of buying. Bought machines costs the business in terms of storage space, maintenance and insurance, leasing equipment or a machine translates to more savings (Hoelscher, 2006). Another approach used in delayed payment involves employing on commission basis rather than salary. This is applicable especially to the sales and marketing team. Delayed payments can also be implemented by negotiating for the most favorable deal in order to spend less.
Minimizing inventory: inventory can be minimized by negotiating for the best possible prices from suppliers. Obtaining inventory at good prices enables the entrepreneur to spend less and make more profit from the goods. Supply management can also be used to minimize inventory (Hansen etal., 2007). Supply management involves providing strategic management to the supplies and procurement departments to reduce the amount of expenditure. Supply management strategies include use of technological tools such as RFID, bar codes to streamline the supply chain system, reduce time and human error in the process of supplying products.
Subsidy financing: subsidy financing is normally in form of government and research grants. The government can provide an economic assistance to uplift a given economic sector in a particular region. Such grants are given out according to some set criterions for which applicants must meet. Besides government, non-profit organizations, charitable organizations, trusts, and foundations also provide grants. Research grants are given out on a competitive basis to by government, corporations, foundations and trusts towards implementation of projects targeting to benefit the public. Research grants mostly target scientific projects based on pandemics, improvement of agriculture and technological projects.
Bank loans
Fabozzi (1998) indicates, “There are several banks that can provide banks loans in the UK, ranging from high street banks, building societies to online banks”. They only differ in terms of the terms and conditions and interests rates levied to the loans. The high street banks have branches all over and still operate in the traditional way where a borrower goes to the counter and negotiates for credit. These banks charge relatively higher interest rates as pointed out by (Fabozzi, 1998)
Online banks are growing fast in popularity as they are deemed to charge lower interests than the high street banks. Online banks incur less expenses, hence the less interest rate. They are largely being preferred over the traditional banks because of the flexibility they offer to clients. One does not need to be in the UK for example to be able to make an online banking transaction, you can be able to transact from any part of the world.
Bank loans are classified as secured and unsecured bank loans. Secured bank loans are taken against collateral, in which case a company provides its assets to serve as security to the loan. Unsecured loans on the other hand are given based on the company’s reputation. A company that has achieved a reputation can use the name to get an unsecured bank loan.
Depending on the “borrowers’ quality, bank loans provide a better alternative to other forms of credit such as bonds (Laurin and Majnon, 2003) Banks provide borrowers a line of credit which is important as it helps a business to realize its capital requirements faster. Laurin and Majnon (2003) points out that bank loans “impose restraint to the borrower forcing them to maintain the earning per share in a narrow margin.” The main banks that provide credit at favorable rates in the UK include; Barclays, HSBC, Lloyds TSB and Standard Chartered.
Barclays: as one of the major international banks, Barclays has been supportive to start-up business in terms of providing start-up capital and mentorship to potential entrepreneurs. Among its package includes; a two year free banking contract with a start-up company besides a start-up loan normally ranging from £ 1,000 to £ 1 million (Pollin, 1997). The bank also provides business guidance to help starting entrepreneurs understand the various business operations processes such as marketing, human resource, cash flow forecast and business planning. The business financing options provided by Barclays include; loans, overdrafts and mortgages.
HSBC: the bank provides “small business loans, overdrafts and business cards to start up businesses (Laurin and Majnon, 2003). HSBC has an alliance with the Prince’s trust and government in which the government and “organizations like the Prince’s trust provide credit guarantee to the small businesses.” Financial package provided by the HSBC include; “invoice finance, trade services, insurance, card acquiring and employee benefit services” when a business start-up is named, the company enjoys among other benefits; free 12 months banking, and free business support (Laurin and Majnon, 2003).
Lloyds TSB: the banks package to start-up business enterprises include; 18 months free banking service, and free small business guide. The company supported has a choice of the paper based either bookkeeping or software supported bookkeeping system, either case is provided free by the bank (Laurin and Majnon, 2003).
Standard Chartered Bank: Stan chart is also one of the international banks with branches in many countries of the world. In the UK, the bank plays a big role in supporting business start-ups and mentorship. Their packages to businesses include; mortgages and bank guarantees. The UK mortgage service provided by the bank is deliberately meant to help foreigners who intend to invest in the UK property market. Bank guarantees enable investors to retain cash in one region and still access credit facilities elsewhere using bank guarantee (Laurin and Majnon, 2003).
Business Angel Investors (BA)
Angel investors are individuals or companies with funds and willing to invest in a promising business idea with hope that the business will grow fast for them to recoup their investment. The funds are lent out on the basis that the investor takes some stake in the business and not against collateral like the bank loan. “The British Business Angel Association works to promote and support early business start-up, private investors account for close to £1 million of investment in early start-ups every year” (Hill and Power, 2002) Angel investors target start-up businesses that require capital of less than $ 500,000.
The association promotes private investment in new start-ups by organizing forums to sensitize investors and entrepreneurs of their availability and the points of unity. The association also organizes forums to sensitize government and other agencies of the need to have angel investors and how they should be helped to attain their investment objectives. In order to get funding from angel investors, they must be convinced that the idea is profitable (Gitman and McDaniel, 2008). This requires a good roadmap in terms of a business plan or proposal.
There are organizations specialized in packaging entrepreneurs and presenting them to potential angel investors at a fee. These organizations provide consultancy services to entrepreneurs seeking angel investors writing a workable business plan and further presenting the idea to potential angel funders. The Angels Den is a clear example of these organizations (Gitman and McDaniel, 2008). Others are the Venture Giant and the London Business Angel.
Angel investors provide a good option for funding to early start-ups, they are also capable of providing the needed capital or filling the financial gap in start-up capital. They are a suitable option for small start-ups looking for capital little capital to finance their venture. Since angel investors invest their own money, it is possible to negotiate a fair deal with them than it is with banks or venture capitalists.
The disadvantage of the angel investors is that they rarely make follow-ups on their investments (Gitman and McDaniel, 2008). This means that if an investment is unsuccessful, the investor may not make a follow-up to inject more money to revive it. Some greedy angel investors can fleece the company at the end rather than promoting it to successful growth. Some angel investors ask for high stakes in the company in return to the investment making it even more costly to involve them in the business.
Venture Capital Firm Managers (VCFM)
Venture capital lists are also referred to as “high risk and high return firms, the firm’s pool up money to a tine of $ 10 million to invest in business enterprises (McNally, 1997). Venture capitalists target companies that require huge capital, besides the investment, venture capitalists also take part in the management of the company to ensure success of the investment objectives. They recoup their investment in two ways; one is in form of salary paid for their management services and allocation of the gains of the company.
The British venture capitalist association is an “industry body that advocates for public policy for private equity companies and venture capitals.” McNally (1997) the association aims at promoting the activities of venture capitals and private equity companies by negotiating for members, and displaying the investors to potential entrepreneurs. The association represents close to 450 firms, of which the number continues to grow. According to McNally (1997) the association’s membership comprises of “professional advisory firms, tax and legal advisors, corporate financiers, international investors, placement agents and secondary purchasers.”
Every business, large or small is formed on a vision of expanding, expansion requires equity and venture capitals play a major role in this course, the beauty with venture capitals is that they provide funds and also assist in the management of the company for an agreed period of time to ensure the company has achieved its growth objectives. Venture capitals offer a better option to entrepreneurs who for some reason are not comfortable with other mainstream lenders (Demaria, 2010). Reasons for venture capital option includes; “that the business is of relatively high risk or has a bad debt history” (Demaria, 2010)
Many entrepreneurs have in the end been ended in disappointments with venture capitals for getting less than what they expected. Often venture capitals end up with higher percentage stake in the business than the entrepreneur expected. They also target high risk and highly profitable businesses as they invest relatively large amounts of money. This means that an entrepreneur has to really convince the investor that the idea can fetch the expected profits. This may translate to high expenditures in terms of market constancy, proposal writing and other forms of documentation that may be required by them.
Requirements of Different Funding Sources
Different lenders as mentioned earlier have set different terms and conditions which entrepreneurs must meet to access credit. Some of the terns and conditions are friendly and attractive to borrowers, although many are unfriendly and discourage borrowers. Banking institutions for example require collateral to give credit; the collateral can be in form of company assets or any property, which the company is willing to attach as security for the loan. This requirement discourages many would be borrowers for fear that their property or assets may be sold of when the business does not pay off (Cetindamar, 2003).
Venture capitals and angel investors negotiate for a percentage stake in the business. Sometimes the percentage stake asked by these investors is higher than what the entrepreneur is willing to give. This makes borrowers to opt to bootstrapping rather than ask for credit from venture capitals or angel investors. Venture capitals insist on taking part in the management of the company for an agreed period before relinquishing the management. During this time, the members involved in the management draw salary benefits from the company, which again is another cost.
Debt Capital
Debt capital refers to the funds taken by a company in form of a loan for investment purposes. Debt capital can be secured from banks at different terms and conditions. Different banks provide debt capital to entrepreneurs at different terms and conditions. The major banks in the UK widely involved in business support by providing debt capital to entrepreneurs at favorable lending conditions include; Barclays, Lloyds TSB and HSBC.
At Barclays, the borrower must meet the banks’ lending conditions, which include; provision of security against the loan. The bank’s lending policies are in line with the UK’s FSA regulations and conditions set by the management board. The bank provides business credit to clients who have held a current account for a period of at least one year. The customer is also required to have paid at least £ 1,000 in the account (Cetindamar, 2003). Besides, the client should have a good debt history to benefit from the Barclays loan scheme.
The HSBC lends out up to £ 25,000 repayable within a period of 10 years, clients need to have a good debt history and be able to provide security against the loan (Levis, 1996.). The security required is in terms of company assets or any other relevant property that can be attached incase the client defaults.
Lloyds TSB has a list of conditions for entrepreneurs seeking credit from them. The conditions set out are contained in clauses, which stipulate the borrowing and lending procedures. Among them includes; a decisive test procedure which requires that the company “proves its ability to meet the debt obligations either by cash or asset liquidation” (Cetindamar, 2003). An agent is also required to administer the loan on behalf of the borrower from the bank.
Equity capital
Equity capital is money sourced from angel investors or venture capitals, both angel and venture capitals invest in a business idea against an agreed stake in the business. Angels target small businesses that require less funds where as venture capitals target high-risk businesses that have high returns. Equity capital providers invest in lucrative ideas that promise high returns in a short time frame (Brewster, 2006).
In order to win their support, an entrepreneur must have a clear proposal indicating how successful the venture can be. Besides, going through consultant firms may provide an easier way to access equity capital. Consultancy firms are accessible to a network of private equity funders; they can be able to market the idea to different funders for consideration (Brewster, 2006).
Possible Difficulties in Attaining Entrepreneurship Financing
The quest by entrepreneurs to find external financing for business start-ups or expansion is always a difficult venture. Some of the difficulties faced by entrepreneurs in this quest include; lack of collateral, high interest rates, poor debt history and unfavorable terms and conditions. Secured bank loans are provided against company assets, which act as security for the loan (Farhoomand, 2005). Some entrepreneurs are afraid of attaching their assets against loans, fearing the assets can be disposed in case of defaulting.
High interest rates remain a barrier to entrepreneurs seeking debt capital. Other companies have tainted their names in terms of credit by defaulting to pay loans (Kaine, 1998). Banks share company’s credit information. Companies with poor credit history have been blacklisted and can hardly access credit financing from other banks (Farhoomand, 2005). Others hurdles lie in the stringent measures set by different banks as requirement for clients to obtain a loan.
Comparison of Finance Availability for SMEs and Large Firms
Small firms face more hurdles in accessing credit than large firms, investors have little confidence in small firms because they lack the expected business experience, have few assets, lack good management structures and are generally disadvantaged in every aspect. As such, advancing credit finance to such firms has higher risks (Gautam, 2008.). Large firms on the other hand boast of well developed management structures, self selling brands, shares at stock, and the best manpower to spear-head the necessary growth. These assets reinforce confidence in investors. Investors would be more comfortable dealing with large firms because they are sure of earning return on their investment.
Large business organizations have a reputation on which financial institutions can approve unsecured loans. Banking institutions approve unsecured loans based on the borrowers’ credit history, asset base and profitability or risk of the venture. Large firms own equity in terms of assets, equity together with reputation attracts lenders to lend to large firms with fewer restrictions. Most small firms suffer in the early stages, struggling with financial constraints. This makes them develop a poor financial history that is less appealing to lenders.
Large firms can also use share as security to obtain a loan from lenders, a company share generally refers to the investments which the shareholders pool together to run the company. A company uses shareholders shares as security against credit advanced to them. The stock values are normally determined at the beginning, its value is relatively constant unlike property and assets, which may appreciate or depreciate with time. When a company is in need of more finance for expansion, its shares can be sold to realize equity finance. Besides sale of company shares, external financing of large firms can be obtained issuing bonds. This practice is commonly referred to as “debt financing.”
Difficulties Faced by SMEs in Securing Finance
SMEs face various difficulties in trying to secure finance for business start-ups or expansion. SMEs are often started by individuals or groups of people as a means to self employment. Such organizations lack an operation history to detail their experience in running an investment venture (Hustedde, 1989.). This makes it hard for investors to belief that they can be able to run the investments. Investors are not ready to have their money used as an experimental ingredient. They are interested in plans that can leads them recoup their investment and profit within a given time.
Banks fear investing in SMEs because they “carry a higher credit risk” as observed by (Matlay, 2005). Matlay (2005) Investors who decide to try the high credit risk by funding the SMEs give small amounts often less than what is requested. The SMEs lack collateral to avert the perceived risk by lenders; this makes it hard for them to convince investors that they can be able to repay.
Large Firms Funding
Large firms get funding more easily than SMEs, the firms are mostly targeted by venture capitalists. Venture capitalists have a high appetite for risk and go for highly profitable ventures (Robins, 2000.). Venture capitalists target the big firms with big sums of money provided the business idea is well packaged to attract them. Large firms can also get funding from high street banks with ease. They are not often subjected to strict conditions like small companies. Large firms for example may not need collateral to secure a loan from a bank; they can secure an unsecured bank loan from the reputation they have built from the years of engagement (Robins, 2000).
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