Difficulties of SME's in obtaining funds
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Transcript of Difficulties of SME's in obtaining funds
THE
MONGAP
Problems Faced By
Small Enterprises
in Obtaining Financing
EY
BY: John Razel Mapaye
You will agree with me that
finance
is the life bloodof every business;
big orsmall
While big and established firms find it relatively
easy to raise finance,
small firms
find it moredifficult to raise fund/finance for their activities
in accessing additional funding
Discouraged
facing difficulty
or
Small enterprises Because
are either …
Are SME’s discouragedWHY ?
Uncertainty
A small business is seriously handicapped by lack of past record thatpotential lenders can analyze
Are they discouragedWHY ?
Small businesses are often time neglected by credit scoring agencies creating a vacuum in one of the most important criteria required by banks and other financial institutions.
Lack of credit scoring
Are they discouragedWHY ?
Because of lack of useful information, they force the small businesses to provide a detailed business plan, list of the firm’s assets, details of theexperience of directors and managers and show how they intend to provide security for the sums advanced.
Stressful requirements
Are they discouragedWHY ?
Maturity Gap
It is particularly difficult for small companies to obtain medium term loans due to a mismatching of the maturity of assets and liabilities. Longer term loans are easier to obtain than themedium and short term loans
Are they discouragedWHY ?
Entangled position is used to describe a situation where banks are unwilling toincrease credit facility without a corresponding increment in security (collateral) from the part of the small business that in turn may be unwilling or unable to make such increment.
Lack of collateral
Are they discouragedWHY ?
Interest rate discrimination
In general, banks and other financial institutions tend to ask forpersonal guarantees from owners of small businesses and will set interest rates at higher levels thanthose charged to big and established companies.
Are they discouragedWHY ?
Equity Gap
It is difficult to find any wealthy person that will be sincerely willing to invest insmall company (though is possible) when they are likely to be more attractive investment opportunities from bigger and more attractive firms.
Are they discouragedWHY ?
Lack of Exit Route
A major problem with obtaining equity finance can be the inability ofthe small firm to offer an easy exit route for any investor who wishes to sell their stock.
Thank You